Summer Kicks Off With Reopening Optimism, But Eyes On Inflation

It may not have felt like it in some places over the weekend, but welcome to summer.

A lot of people are trying to grab vacation time in these warm months after missing the chance last year. For those of us sticking around, however, there’s plenty of Wall Street action the next few days and throughout the new month .

June looks like it might start with a bang as major indices rose overnight, helped along by gains in so-called “reopening” stocks like energy, airlines and cruise stocks. We just slowly but surely climb higher, and many people appear to be in a buying mood after Memorial Day and the nice rally last week. The question is what volume might look like as it’s a shortened week and some participants might have decided to extend their weekends.

Rates are moving up a bit with the 10-year yield now at 1.62%, which may help financial stocks, and crude futures jumped back above $68 a barrel. That’s near the highest level since the pandemic began, and may be linked to peoples’ optimism about reopening and travel.

It is a bit worrisome to see gas prices now at seven-year highs above $3 a gallon in the U.S. Crude’s gains are getting to a level where they might start having a negative impact on industries like trucking and airlines. However, with so many people having saved money to travel, there’s pricing power at the pump.

May wrapped up with an almost 2% gain for the S&P 500 Index and a very small rise for the small-cap Russell 2000 Index. The Nasdaq 100, heavily weighted toward tech stocks, dropped about 1% last month.

h2 Countdown Begins To Friday’s Jobs Report/h2

It’s a short week, so Friday’s jobs report is probably going to feel like it’s here before we know it. A Wall Street Journal consensus of analysts pegs May jobs growth at 674,000.

Back in April, the economy created just 266,000 jobs—way below analysts’ average estimate. That put the three-month average growth at a respectable but not necessarily amazing 524,000. Depending on how the May number looks, it could either make April seem like an outlier (as some analysts expect) or cause some head scratching about why job growth isn’t increasing more quickly.

Either outcome could factor into the Fed’s thinking as they approach their June 15-16 meeting. Slower jobs and wages growth, if that’s what Friday shows, would likely temper some of the inflation worries that might have contributed to a more hawkish tone coming out of the last Fed meeting. Another weak jobs report would also likely ease investor fears about any potential near-term tapering of the Fed’s stimulus.

On the other hand, even a huge number for May arguably wouldn’t raise too many fears of “overheating,” because investors (and possibly the Fed, too) would likely want to wait and see the June number to make sure a strong May isn’t a one-off.

Basically, there are a lot of scenarios here, but for cyclical sectors like energy, financials and industrials that tend to perform better in a thriving economy, a strong jobs report would likely be seen as supportive. We’ll dive deeper into analyst expectations tomorrow.

There’s also a couple of housing-related data points this week, and a bunch of earnings reports.

h2 From Earnings Corner/h2

Earnings season is officially over, but there’s a lot of individual stories from the corporate world you might want to monitor as the week goes by.

Zoom Video Communications (NASDAQ:ZM) reports after the close today. The company has been a poster child for stocks benefiting from people being stuck at home. But as the lockdown mentality eases in the United States, it could be interesting to see how the company pivots. As we’ve often seen, once people get used to working a certain way, it can be hard to change their habits.

The same dynamic could play into earnings from DocuSign (NASDAQ:DOCU), another “stuck at home” stock whose shares soared during the pandemic but took a breather so far this year.

Other key earnings reports to consider taking a look at this week include Broadcom (NASDAQ:AVGO)—which outpaced analysts’ estimates last time out but saw shares fall anyway—and athletic gear maker Lululemon Athletica (NASDAQ:LULU). There’s also Advance Auto Parts (NYSE:AAP) and Slack (NYSE:WORK).

Checking back, Salesforce's (NYSE:CRM) earnings last Friday really blew analysts’ estimates out of the water. It was also the fourth earnings period in a row that the Dow Jones Industrial Average component beat Wall Street’s consensus. Guidance and margin looked strong, too. As research firm Briefing.com pointed out, the quarter’s strength was across the board, but the government/public sector was particularly strong as governments increasingly turned to CRM’s platform.

h2 Washington Watch/h2

Remember a month or two ago when the market seemed to draw energy from Washington amid talk of an infrastructure bill? That kind of lost steam over the last few weeks, which may have been one reason stocks kind of treaded water, but it’s back on the front pages this week as the two parties seem to be negotiating a package.

Politico, which covers politics on Capitol Hill, reported that the two sides remain far apart but that it’s possible to see the “contours” of a bipartisan deal. Any signs of progress here could potentially inject new life into those same cyclical sectors discussed above. We’ll have to wait and see.

There’s plenty of other things to wait for here in this new month, including a Fed meeting coming up soon on June 15-16, homebuilder earnings, and a commodity market that appears to have lost a bit of its forward momentum over the last few sessions. Any or all of these items could play a major role in where markets go over the next 30 days.

Price Threat Still There: Looking back at last Friday, the higher than expected Personal Consumption Expenditure (PCE) price data for April once again put inflation worries front and center. Earlier last week, some commodity prices like lumber, corn, and crude ticked lower, but the week ended without much sign of a major commodities retreat. Combined with the PCE data, this likely means inflation worries aren’t going away ahead of the Fed meeting later this month.

Even if commodities pulled back and took a short-term inflation threat off the table, it’s possible we could see price pressure come back later this year, perhaps in Q4. Remember, we just wrapped up an earnings season that saw major companies like JetBlue Airways (NASDAQ:JBLU), Procter & Gamble (NYSE:PG) and Coca-Cola (NYSE:KO) raising prices due to the rising cost of raw materials, and then last Friday, the CEO of casual dining company Red Robin (RRGB) was on CNBC talking about supply and price issues affecting chicken and soybean oil. Housing industry prices have gone crazy due to the price of lumber. We’re almost certainly not out of the woods yet, no pun intended.

Rough Landing: Airline stocks flattened in May, hurt by rising fuel costs, worries about COVID spreading in Asia, and possible profit-taking after the rally earlier this year. Things improved a bit last week after some positive words from airline executives at an industry conference, including American Airlines (NASDAQ:AAL) saying there are “encouraging signs” in business and international travel. Those are two business segments where the pandemic has hurt airlines most. One simple measure of airline industry health is the daily Transportation Safety Administration (TSA) data showing how many U.S. passengers went through gates at airports. Recently, the daily figure hit 90% of levels from the same date in 2019 for the first time since the pandemic began (though May 30 levels were nearly one million below the same date two years ago).

Checking the Technicals: From a technical standpoint, both the SPX and the NDX have been on more positive tracks recently. The SPX held gains above psychological resistance at 4200 last week, putting the index less than 1% below its all-time high of 4238 posted back on May 7. The NDX appears to be in recovery territory after a test of the May low failed on May 19. It’s been carving its way higher since then but remains well below the April 29 peak of 14,073.

Disclaimer: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Written By: TD Ameritrade