Before The Bell - This holiday-abbreviated trading week, which also saw many traders take the last few days off for the Rosh Hashanah holiday, has been very light on earnings, economic, and Federal Reserve news. With the lack of market-moving events, investors have focused their attention on the surging coronavirus Delta variant cases and what impact the virus may have on the U.S. economy over the remaining months of this year and in 2022. Concerns about slowing growth, exacerbated by weaker-than-expected August employment data last Friday and the recent drop in consumer confidence, both of which reflect Delta variant worries, have played a role in the profit taking we are seeing and the recent selective rotation out of some of the high-growth sectors and into more defensive-oriented stocks. On a positive note, we learned this morning that initial weekly jobless claims fell to a pandemic-era low of 310,000, a decrease of 35,000 from the prior week.

In recent weeks, worries that the third wave of the coronavirus will hurt economic output both here and around the globe have pressured the value-oriented cyclical stocks, many of which traded higher in the late spring and early summer months on the reopening theme. The latest Federal Reserve Beige Book summation of economic conditions (released at 2:00 P.M. (EDT) yesterday) echoed such concerns, with the central bank noting that “the deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions." 

Investors should note that airlines Southwest Airlines (LUV) and United Airlines (UAL) have cut their guidance this morning, citing the Delta variant’s impact on travel. Shares of both companies are down in pre-market action. Conversely, the stock of lululemon (LULU) is pointing toward a markedly higher opening after the athletic apparel maker reported blowout quarterly results yesterday afternoon. 

The Dow Jones Industrial Average, which contains a number of large-cap value names, along with the broader S&P 500 Index, are on three-day losing streaks, and the equity futures are indicating that the modest selling will continue at the start of trading today. The materials and energy sectors have been the biggest laggards during the recent bearish sessions. 

Investors facing a number of worries, including the aforementioned Delta variant surge, the looming debt-ceiling debate in Congress, and the possibility of higher taxes, are looking at the more defensive-oriented sectors. The utilities and consumer staples stocks were the best performing groups yesterday, and the yield on the benchmark 10-year Treasury bond is pulling back a bit this morning. Ironically, the recent more-defensive positioning we are seeing on Wall Street has pushed investors into the mega-cap high-growth FANG stocks, notwithstanding yesterday’s modest profit taking in those names. These technology industry behemoths are being looked at as defensive plays, given the combination of their high-growth potential and financial wherewithal, the latter of which is underpinned by enormous cash positions on their balance sheets. The prevailing thought is that they are best equipped among the higher-growth companies to weather any operating issues that may evolve if inflation becomes more than a transitory problem. 

Investors will be looking closely at tomorrow’s producer (wholesale) pricing data for signs about inflation. The consensus is that producer prices moderated a bit last month from July’s feverish pace, which, if correct, may give a boost to the higher-growth sectors to end a week that so far has seen a rotation out of those areas. The small-cap Russell 2000 fell more than 1% yesterday in a moment of some investors reducing risk positions. The China-based Internet and gaming stocks, including Baidu (BIDU), Alibaba Group (BABA) and JD.com (JD), are under pressure in pre-market action, as China continues its regulatory crackdown. The measures have wiped out billions of dollars in market value from that country’s Internet giants.   

We also think the continued interest in the FANG stocks stems from investors wanting to stay heavily invested in the stock market, but maybe more so via quality names than the riskier holdings, especially with valuations rather frothy these days. More than 75% of the S&P 500 companies currently trade above their 200-day moving average. An easy way for subscribers to identify the high-quality names is to look at the stocks ranked 1 (Highest) and 2 (Above Average) for Safety. Value Line makes this often time-consuming task quite simple with its stock screening capabilities. 

In general, the Federal Reserve’s ultra-loose monetary policies have created very few attractive investment alternatives to equities, and we don’t expect this backdrop to change much even if the Fed begins to taper its bond-buying program, perhaps as early as this November. The still historically low borrowing costs have the financial system flush with liquidity and even if the central bank reduces the pace of monthly asset purchases, it will still won’t be totally ripping off the monetary support band aid. The European Central Bank this morning announced that it is holding interest rates steady, but will begin to scale back on its asset purchases. The pace of the tapering, though, was not revealed, leaving the ECB with some wiggle room moving forward.  – William G. Ferguson 

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