Before The Bell - The name of the game on Wall Street these days is volatility. It has produced some pronounced and at times swift changes in the course of trading on both a daily and intra-day basis. With the major market averages hovering around record highs and P/E ratios quite stretched, investors will need another stimulus to push stocks to even loftier highs. But on this front, what equity market participants are getting is a daily mixed bag of news and that is likely causing the notable gyrations we are seeing on Wall Street over much of the last fortnight. This morning, more volatility is probably in the cards, as the futures are pointing to a lower start to the week for equities. 

So what are the major events that investors are zeroing in on in recent days? At the forefront is the ongoing debate over another major stimulus plan on Capitol Hill; the major equity averages cheered comments from Treasury Secretary Janet Yellen last week calling for more coronavirus-driven stimulus. Not surprisingly, the small-cap Russell 2000 rallied sharp on Friday (up more than 2%) when the other major averages saw big swings, but ultimately ended the week’s final session relatively unchanged. Small-sized businesses would likely be a short-term beneficiary of more stimulus. The calls for such stimulus, along with a supportive fourth-quarter earnings season in which the large majority of S&P 500 companies exceeded expectations, and encouraging data of late on the pandemic as more Americans get inoculated with vaccines, are being pit against worries about rising bond yields (historically not a good backdrop for equities) and mixed economic data in recent months. 

The rising fixed-income yields have taken a bite out of some of the high-growth stocks, most notably in the technology space. Against this backdrop, and with valuations indeed looking high, we would urge subscribers to give more attention to the value names with top-notch balance sheets. Many of these blue-chip names are among the stocks ranked 1 (Highest) and 2 (Above Average) for Safety by Value Line. These issues have historically outperformed the broader market during turbulent times and with volatility picking up of late we may be entering a stretch where the daily movements among the major equity indexes will test the mettle of some investors, particularly those of a conservative bent. The value stocks tend to outperform the growth names when concerns about inflation surface. We would also look at some of the sectors that will benefit from the Biden presidency. And if bond yields continue to move higher (the rate on the 10-year Treasury note—above 1.30% this morning—recently hit a 12-month high), the large-cap financial names may be of greater interest, as higher yields enhance the earning power of the lending institutions, particularly the banks. 

Looking ahead to the week at hand, the main interest of Wall Street will likely be the aforementioned stimulus package debate on Capitol Hill. And on the heels of last week’s strong report on retail sales, a number of the retailers will be in focus, as they begin reporting January year-ending results this week. There will be important data from the business beat, including some reports (i.e., consumer confidence and personal income and spending) that will also push investors’ eyes toward the consumer discretionary sector. We also will get releases on new home sales, the leading indicators, durable goods orders, and the revision to fourth-quarter GDP. And starting tomorrow, investors will be paying close attention to Federal Reserve Chairman Jerome Powell’s prepared remarks before Congress. Given the concerns about the coronavirus’ impact on the labor market and emerging inflationary pressures, his commentary will be closely scrutinized and may potentially influence trading over the middle sessions of this busy week for Wall Street. 

Before the bell, the equity futures point to a lower start for the U.S. stock market. So far overseas, it has mostly been a sea of red ink. The main indexes in Asia finished with losses overnight, while the major European bourses are in negative territory as trading moves into the second half of the session on the Continent. As noted above, what we are likely to see at the commencement of trading stateside is some continued rotation out of the high-growth stocks, such as technology (the NASDAQ futures point to some selling in the big-tech names), and into those companies that may be the immediate beneficiaries of any return to normality. The value names in the cyclical sectors (i.e., industrial and materials) are starting to garner some interest on Wall Street. Stay tuned. – William G. Ferguson                 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.