It’s hard to stay positive in a market like this, but things seem to be looking up – at least in the short term.
The most recent positive shift in investor sentiment couldn’t have come at a better time because this week is the start of second-quarter earnings.
Here’s what happened…
We started last week with a negative outlook; in our view, the market was in a no-win situation with the unemployment and labor report that would be released on Friday.
If the jobs data from the Bureau of Labor Statistics (BLS) was good, investors would expect that to clear the way for an even-bigger-than-expected rate hike from the Federal Reserve and sell stocks. If the jobs data was worse than expected, investors would worry about recession and sell stocks.
There didn’t seem to be a golden zone for the unemployment data to prevent a selloff… However, that’s exactly what appears to have happened.
The BLS reported that jobs grew by 372K in June, which was much better than the expected 260K. The unemployment rate held steady at 3.6%. The news was so far beyond expectations that it offset the damage that would have otherwise been caused by expectations about the Fed.
Investors are now pricing in a 0.75% rate hike in late July after that report but were willing to keep stock prices higher anyway. This was all good news. Even the so-called “meme stocks” like AMC Entertainment (NYSE:AMC), Bed Bath & Beyond (NASDAQ:BBBY), and GameStop (NYSE:GME) staged a short-term comeback last week.
So, considering all of that, here’s what we’re watching for this week.
Wednesday, July 13
The Consumer Price Index (CPI) will be released again for the prior month and expectations are high. Investors expect annualized inflation to be reported as 14%, or 7.44% if you exclude food and energy prices. This report will likely trigger volatility.
Thursday and Friday, July 14-15
The big banks start reporting earnings, starting with JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS), on Thursday morning and Citigroup (NYSE:C), U.S. Bancorp (NYSE:USB), and Wells Fargo (NYSE:WFC) on Friday morning.
Expectations for profits are low enough that jumping that hurdle shouldn’t be difficult for the banks. This could set things up for a nice rally through the end of July.
Friday, July 15
Monthly retail sales will be released by the Census Bureau. So far, retail sales have been holding steady despite inflation, which is good. The U.S. economy is mostly consumption, so a negative report would spook traders. Expectations are for an increase of 0.9% in sales on a month-over-month basis. Considering the surprising jobs report, we are optimistic retail sales will look good.
What to Do
Over the last few weeks, we have recommended the tech sector for new entries, and we stand by that for this week as well. The Tech and Retail sectors performed the best last week, with average returns of 5.93% and 5.97%, respectively.
However, the risk in these sectors is not evenly distributed. When the market rises, like it did last week, the smallest companies usually perform better, but experience more severe drops when the market declines. For example, over the last quarter, small-cap tech stocks have doubled the declines of large-cap tech stocks.
So, even though the “meme stocks” made a comeback last week, we recommend steering clear of the riskiest stocks until the uncertainty around the Fed’s rate hikes has receded. We don’t expect to get clarity like that until later this fall.
The bottom line: The market pulled off a neat trick last week by avoiding a selloff, despite rising expectations for rate hikes. There is a flood of quarterly profit reports starting this week, which is the biggest X-factor for traders right now. If profit growth rates are better than expected, we expect the S&P 500 to challenge its highs from May.