Before The Bell - As we approach the midpoint of September, it has been a month to forget so far for those long equities. Coming off an August that saw the major equity average at or near all-time highs, some profit taking was expected as the market had come so far so fast since its 2020 nadir in March. The selling has been rather pronounced at times lately, with the NASDAQ Composite falling into correction territory as investors took profits in the big technology names. 

So what is causing the selloff in addition to some normal profit taking? Our sense is that Wall Street doesn’t like some growing uncertainty, which is coming in the form of the upcoming elections, worries about the possibility of a second wave of the coronavirus this fall as flu season heats up, and questions as to whether Congress and the White House can agree on a new stimulus package for Americans and small businesses that have suffered from the COVID-19 pandemic. The higher-than-expected initial jobless claims data last Thursday suggests that more help from Washington will be needed to keep the economy on the recovery track. These concerns, along with the absence of earnings news to grab the attention of the investment community, has weighed on the market over much of the last fortnight.

There have not been many places for investors to hide in recent weeks, with the once darlings of Wall Street technology stocks under selling pressure, as investors take profit after the stocks rose to record levels in August. Even as the Dow Jones Industrial Average, which had lost more than 1,500 points after peaking at over 29,000 earlier this month, rallied on the final session of the volatile week, the NASDAQ finished 66 points to the downside on Friday. Weakness in technology was once again the culprit.

This week, the attention of equity investors will be on the Federal Reserve, as the lead bank begins its two-day monetary policy meeting tomorrow morning. With the prevailing consensus that the central bank will make no changes to its accommodative stance, the investment community may be looking to hear what the Fed says about inflation and raising the bar above the 2% target, so that it is not backed into a corner if inflation is on the uptick, but the economy is still being hurt by the lingering COVID-19 pandemic. Recall that the central bank at its annual economic policy symposium last month announced a new framework to inform their thinking on rate-setting in light of inflation. Given this backdrop, investors may want to avoid some of the banking stocks, as low interest rates hurt the earning power of the lending institutions. Conversely, it could be more wind in the sails of the homebuilding stocks. Our latest review of the homebuilding industry can be found in Issue 6 of The Value Line Investment Survey, which is available this week for subscribers on valueline.com.  

There will be some other important reports on the economy this week in addition the Federal Reserve’s monetary policy decision, including data on industrial production and capacity utilization, housing starts, and retail sales. The latter report will be closely watched to see how the U.S. consumer and retailing sector are doing as the economy emerges from the coronavirus-driven shutdowns earlier this year. To date, the largest retailers and mass merchandisers, including Walmart (WMT), Amazon.com (AMZN), and The Home Depot (HD), have fared the best during these unprecedented times.
Turning to the new trading week, the futures are suggesting that the U.S. stock market will get off to a good start today. The uplifting vibes are being driven by positive developments on the COVID-19 vaccine front and some M&A news. The latter is often viewed as a sign of a strong equity market. 

Of Note, we learned that Oracle (ORCL) has won the bidding war for a partnership with TikTok’s US business unit, edging out Microsoft (MSFT), which was viewed as the frontrunner for a tie-up with the fast-growing social media company. Two other major deals also were announced over the weekend. Chipmaker NVIDIA (NVDA) has agreed to purchase SoftBank Group’s chip unit Arm Limited in a transaction valued at $40 billion (the largest ever in the semiconductor industry), while Gilead Sciences (GILD) plans to buy Immunomedics (IMMU) for roughly $21 billion, adding the latter’s tumor-fighting drugs to the pharmaceutical giant’s portfolio. The NVIDIA deal may give a needed boost to the technology stocks, which, as noted, have sold off in recent weeks 

On the vaccination front, the market is reacting positively to news that AstraZeneca’s (AZN) late-stage coronavirus vaccine trials with the University of Oxford has resumed, after safety concerns over an adverse reaction from a participant in the study had led the company to pause trials temporarily a week ago. – William G. Ferguson

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