Critical information for the trading day.
Summertime markets can be a bit dysfunctional. Last week, for example, the top two sectors were the classically defensive utilities, and the highly cyclical materials. The total market volume on the New York Stock Exchange and the Nasdaq on Tuesday was 59% below the peak of the year, and 19% below the year’s average.
Tavis McCourt, institutional equity strategist at Raymond James, points out the last two years, there was a big value and cyclical bias in stock markets after Labor Day, and in 2018, markets basically collapsed after the summer drew to a close. “We believe as the chase for the end of the year begins, a renewed value/cyclical outperformance is likely along with higher 10-year Treasury yields, but like it has been for the past 18 months and will be for the foreseeable future, the virus is the boss,” he says.
The 10-year, he says, is the linchpin to the whole market. Quantitative easing, bank liquidity, Treasury gamesmanship and delta variant fear should all fade in the second half, allowing yields to rise up to a reasonable level. That in turn will get the yield curve steepening, helping value stocks, small-caps and cyclicals — which have a long way to go, given the summer reversal in markets.
Another huge tailwind, he says, is that financial obligations as a percent of disposable income are near 40-year lows. “Consumers have dry powder to spend, for a long, long time even with incomes returning to trend line,” says McCourt. Public company leverage also is down — on a next 12 month basis, net debt-to-Ebitda of S&P 500 companies has dropped to 1.07 in July from a peak of 1.55, and 1.28 in December 2019. Inventories, he adds, are “horribly low,” which while depressing this year’s economic output will lead to restocking demand over the next two years.
For the “de-urbanization theme,” McCourt’s stock picks are Lennar LEN, American Homes 4 Rent AMH, Eagle Materials EXP, KB Home KBH and MDC Holdings MDC. For “discounted valuation and improving return on equity,” he likes AutoZone AZO, Old Republic International ORI, Jabil JBL, Triumph Bancorp TBK and Meta Financial Group CASH.
For “economic reopening beneficiaries,” he likes National Retail Properties NNN, Bloomin Brands BLMN and Mohawk Industries MHK, and for infrastructure beneficiaries, he likes Evoqua Water Technologies AQUA and Atlantic Sustainable Infrastructure AY.
Fed minutes on tap
Minutes from the most recent Federal Reserve interest-rate setting committee are due for release at 2 p.m. Eastern, with much of the suspense about the central bank’s direction taken away by earlier stories this week from The Wall Street Journal and Bloomberg News, that both pointed to imminent announcements that the bond-buying program will be phased out.
“In short, at this point, the Fed is just working out the details. Barring some dramatic change in the economy, tapering of asset purchases will begin in the next few months and end by the middle of next year,” said Tim Duy, chief U.S. economist at SGH Macro Advisors.
Housing starts slumped 7% in July, coming in below economist estimates.
Home-improvement chain Lowe’s LOW beat earnings estimates and reported a surprise increase in sales. Discounter Target TGT reported forecast-beating earnings and revenue, as it authorized a new $15 billion stock buyback plan.
Networking giant Cisco Systems CSCO and graphics chip maker Nvidia NVDA report results after the close.
The markets
Stock futures ES00 NQ00 were looking a little weaker, following the 282-point downturn in the Dow industrials DJIA on Tuesday that ended a five-session winning run. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose to 1.27%.
The tweet
Ajmal Ahmady, until Saturday the central bank chief of Afghanistan, gave a pretty grim diagnosis for the economy.
