Before The Bell - As we pass the midpoint of May, the month is looking quite different from the previous 30-day stretch. Recall that the major equity indexes, which fell into bear territory in March as the coronavirus pandemic slammed the United States, bottoming on March 23rd, staged a tremendous rally in April. The averages retraced a good deal of the losses, led by the NASDAQ Composite, which on the strength of the technology sector turned positive earlier this month. However, the rally has lost some steam in recent weeks, with volatility still remaining a central theme for trading. In general, investors are currently weighing the dismal earnings and economic data against the partial reopening of the U.S. economy, some encouraging news on the vaccination front, and aggressive monetary and fiscal actions. The latter group seems to be winning out today, as the equity futures are sharply higher this morning (more below).

Last week, the intraday swings in trading were again at times swift and pronounced. In fact, the weekly trading range for the Dow Jones Industrial, which along with the NASDAQ and S&P 500 Index finished lower during the five-day stretch, was more than 1,000 points. Investors were unnerved by another batch of brutal economic data, including deep plunges in retail sales and industrial production. The former category tumbled a record 16.4% during April, which was much worse than the consensus expectation of a 12% decline. Core retail sales, excluding the volatile auto and gas components, tumbled 16.2% following a decrease of 2.8% in the prior month. 

The economic data notwithstanding, the big story for investors was the latest commentary from Federal Reserve Chairman Jerome Powell. We noted a week ago that the message from the Fed leader may have the most significant impact on trading, and that certainly was the case, as his dour commentary on the U.S. economy sparked some heavy selling on Wednesday. Specifically, Chairman Powell said that the coronavirus-driven recession may be longer and more painful than many pundits were anticipating. And on point, another three million-plus American workers filed for initial unemployment insurance, bringing the eight week total to well over 35 million Americans. The dreadful near-term economic data may also get worse before it gets better, with the U.S. economy only partially opening more than two months after the COVID-19 pandemic brought the nation’s output to depths not seen since the 1930s. With volatility on the climb again, we think a prudent investment strategy may be to focus on stocks we have ranked 1 (Highest) or 2 (Average Average) for Safety. History has shown that these stocks tend to outperform the broader market averages during turbulent times.

The coronavirus headlines, along with another round of news from the business beat, will likely be the main drivers of trading this week. The economic news will have a heavy housing bent to it, with reports on housing starts and building permits and new and existing homes sales due over the next five trading days. We will also get the latest reading on home builder sentiment. This data may have an impact of the performance of the homebuilding stocks, including those of industry leaders Lennar (LEN) and D.R. Horton (DHI). The homebuilding statistics may also bring some of the building materials and construction and engineering companies into focus. Home improvement giants Home Depot (HD) and Lowe’s (LOW) are seeing steady business during the ongoing pandemic, as stay-at-home guidelines to slow the spread of the deadly virus have many households tackling do-it-yourself home improvement projects.

This will also be a big week for the retailers. The group of brick-and-mortar retailers, most with April-ending quarters, are expected to release financial results. The quarterly reports are likely to be far worse than the average earnings decline for the S&P 500 companies (over 90% have reported results) this cycle. To be fair, the figures also will include the month of April, which felt the full impact of the economic shutdown, but nonetheless it will do nothing to quell the heightened concerns about the ongoing solvency of these companies that were already struggling pre-crisis, with many consumers migrating to online shopping. In fact, online shopping rose more than 8% in April, and thus we think that investors looking for a stake in the industry would be best served to target those companies with a significant online infrastructure.  We will get quarterly results from industry heavyweights Walmart (WMT), Target (TGT), Home Depot, and Lowe’s this week.

Before the opening bell, premarket action is suggesting that the recent rollercoaster ride will continue for investors. The futures are pointing to a sharply higher opening for the U.S. equity market, with the good tidings that we have seen overseas today (both in Asia and Europe) continuing on these shores. In the face of continued dismal earnings and economic news, some investors appear to be looking farther out and hoping that the partial reopening of the U.S. and world economies will help companies during the latter part of this year. That, along with some recent promising news on the vaccination, is giving stocks a big boost this morning.  Moderna (MRNA) — one of the many companies leading the push for a COVID-19 cure — said that its interim clinical data on a potential coronavirus vaccine had yielded a “positive” result. The Phase 1 study is being led by the National Institute of Allergy and Infectious Diseases (NIAID).We also think the aged old theme “don’t fight the Fed” may be in play here, as the central bank’s historic monetary actions (i.e., easy money) are providing support for stocks during these unprecedented times. Speaking of the Federal Reserve, the minutes from the latest monetary policy meeting will be released at 2:00 P.M. (EDT) on Wednesday, which may be another focal point of the investment community’s attention. 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.