Recently, interest rates started rising, oil prices have been going higher, and a battle is developing between those expecting a large amount of inflation and those that don’t.
A Week in Review
The major averages had another positive week - S&P 500 +2.3%, Dow +3.1%, Nasdaq +4.2%, Russell 2000 +5.7%. The Dow is now basically flat on the year (-0.2%). This week's rally was led by the Industrials (+5.7%), Technology (+4.3%), and Consumer Discretionary (+4.0%). Health Care (-0.4%) and Telecom (-0.8%) were the only two negative S&P sectors.
Monday's strong rally actually began the previous Friday when the stock market surged to fresh session highs in the last five minutes of trading. That momentum carried over into premarket trading Sunday and Monday.
The S&P gained 2.6% on Monday's session, hitting fresh 2009 highs and closing above its 200-day moving average for the first time since December 2007.
Even the bankruptcy filing from General Motors (GM) could not hamper Monday's rally.
The moves in the major indices for the remainder of the week were more modest.
Friday's Nonfarm Payrolls came in at -345,000, well below the -520,000 consensus estimate. There was a larger-than-expected jump in the Unemployment Rate (9.4% vs. 9.2% consensus) and a decline in Average Weekly Hours (33.1 vs. 33.2 consensus). The May report did not set a good stage for a meaningful pickup in consumer spending. While we're seeing some signs of improvement from awful levels in various sectors of the economy, no economic recovery can build forward momentum without improving employment prospects. The slowing pace of layoffs - evident since January - could be interpreted either that job losses are slowing in anticipation of better times ahead, or that employers have cut jobs pretty much to the bone and can't cut much more. Keep in mind that employment, as an indicator, lags other economic gauges. Businesses are quick to layoff help when times get hard, but are more reluctant to re-hire until they see solid signs of economic improvement.
A Look Ahead
This week is extremely thin in economic data. There are no notable earnings releases and the only important economic releases are the Trade Balance on Wednesday (June 10) and Retail Sales on Thursday (June 11).
I wanted to point out some aspects to watch that could trigger a more substantial pullback or price correction. Recently, interest rates started rising, oil prices have been going higher, and a battle is developing between those expecting a large amount of inflation and those that don’t. Stocks that do not have much growth potential may stall and a price pullback would reflect an adjustment to these new realities. The next quarter earnings will be watched much more closely on the basis of bona fide growth instead of simply beating the lowest possible bar in terms of expectations.
Most of the run up of stocks leading the rally thus far have been based on beaten down stocks simply beating low-range projections and bleeding negative top line growth in terms of revenues and margins. We believe that the new quarter will truly flush out the best prospects to build our investment positions. Stocks that are unable to demonstrate their potential for growth are, in many cases, way ahead of themselves.