Before The Bell - The name of the game these days on Wall Street is volatility. Indeed, the recent moves by the major averages on both an intra-day and daily basis have been swift and pronounced. Driving this seesaw action have been an investment community that is weighing a number of events, from the economy and earnings to coronavirus updates and Treasury market yields. This balancing act, at times, has worked in favor of both the bulls and the bears, mostly depending on which of the aforementioned events is front and center on the investment community’s radar. 

The most recent five-day stretch produced some notable moves. Last week the major averages sold off on inflation worries, as bond yields moved higher early in the week, and then took another move down after Federal Reserve Chairman said that the central bank might eventually look to dial down some of its accommodative monetary policies, which have underpinned the market’s rally from its 2020 coronavirus-driven nadir. Some worries about further COVID-19-realted lockdowns overseas also unnerved investors for s stretch last week. However, toward the end of last stretch, the major indexes recovered sharply, with a late-day rally on Thursday spilling over to the week’s final session. A pull back in bond yields, as well as some encouraging data on the economy were the driving forces behind the positive conclusion to the volatile week. Of note, continuing jobless claims fell below 700,000, the lowest pandemic level to date.

On Friday, it was a sea of green ink among the major equity averages, with the Dow Jones Industrials, the NASDAQ Composite, the S&P 500 Index, and the Russell 2000 gaining 453, 161, 65, and 36 points, respectively. It should also be noted that the Dow Transports were up sharply, likely the result of some encouraging data from the business beat and an improving outlook for the U.S. economy in the second half of the year. The stock market is trading on the assumption that the continued rollout of the COVID-19 vaccines stateside will likely lead to increased demand and output over the final six months of this year. This scenario would likely be a boon for corporate earnings. 

Given that the U.S. stock market tends to be forward-looking, this may be a good time for investors to look at some of the sectors that will likely benefit from more re-openings later this year, including retailers, restaurants, and some of the travel and leisure companies. On point, investors should note that Southwest Airlines (LUV) announced that it will buy 100 737 Max jets from Boeing (BA). We also think that Washington D.C. will look to pass some kind of infrastructure plan later this year, which may help some of the industrial and construction sectors. The Biden Administration, which is keen on rebuilding the nation’s infrastructure, is expected to speak on this topic on Wednesday. Conversely, with output possibly spiking in the summer and fall months and the U.S. government spending at a historic pace, it may bring concerns about inflation. Against this backdrop, we would tend to stay away from some of the higher-yielding equity groups, as their stocks may be hurt by a rise in bond yields. That would make fixed-income securities more attractive options for those investors looking for income. A rise in inflation also may weigh on some of the food processing companies, as higher input costs would likely their hurt earning potential going forward. It is worth noting that shares of General Mills (GIS) fell last week on such concerns.

So what lies ahead for investors in this abbreviated week of trading? (Note that the stock market is closed on Friday for Good Friday.) Our sense is that the volatility will continue, as investors monitor Treasury yields. The business beat also will be in Wall Street’s focus, with reports due on consumer confidence, manufacturing activity, continuing jobless claims, and employment and unemployment activity. The jobs data will be released on Friday, and with the stock market closed, the employment data may make for an interesting first full week of trading in April when investors return from the long Easter holiday next Monday. 

Before the market’s open, the equity futures point to a modestly lower start for the U.S. stock market. So far overseas, the tidings have been positive. Most of the main indexes in Asia finished higher overnight, while the major European bourses are in the green as trading moves into the second half of the session on the Continent. One developing story to watch were warnings from investment banks Credit Suisse and Nomura they faced potentially billions in losses linked to hedge fund Archegos Capital. The institutions that worked with Archegos and lent it money to buy shares were scrambling to offload Archegos' investments after a handful of risky bets made by the hedge fund went sour. The rush to exit these positions left the banks with huge losses and weighed on the stocks that were unwound, including shares of ViacomCBS (VIAC) and Discovery (DISCA) on Friday. 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.