Investors bid up cyclical stocks in the past week, but the economy will have to prove that the reflation trade — a bet on economic growth — is the way to go as concerns about Covid linger. Markets are deep in the dog days of August. That means the Federal Reserve and key data, particularly retail sales, could provide some direction for stocks in the week ahead. Major stock indices were mixed in the past week, with the Dow and the S&P 500 hitting new highs and the Nasdaq flattish. But there was a clear move higher in cyclical sectors that gain when the economy is expected to improve. The moves also paralleled a jump in bond yields. The 10-year Treasury yield popped to 1.36% on Thursday but slipped as low as 1.29% on Friday amid a surprising drop in consumer sentiment. The metric fell to its lowest level since 2011 as consumers grew worried about the coronavirus and its potential impact on the economy. Materials were up 2.7% for the week in Friday trading, and industrials were up 1.4%. Financials, which do best when rates are higher, were up 1.9% for the week. Tech, which underperforms when rates rise, was flat with a slight gain of less than 0.1%."I do think there will be a resurgence of the reflation trade. I do think you can buy some of the cheap cyclicals," said Adam Parker, founder of Trivariate Research. Parker said he likes materials, metals, mining and some energy. Treasury yields had been moving higher after stronger jobs and inflation data. But they were kicked into a higher gear by comments from a parade of Fed speakers, who all shared their views on what it would take for the central bank to wind down its bond-buying program. The Federal Reserve has been purchasing $120 billion of Treasury bonds and mortgage-backed securities to prop up the economy and provide market liquidity during the worst days of the Covid pandemic. On Wednesday, the Fed will release the minutes of its last meeting. While that is viewed as old news, the release will be highly scrutinized for more details on the "tapering" process. The Fed's move to slow and ultimately end its bond buying is important since it is the first major step away from easy policy and a step toward interest rate hikes. The views of central bank presidents have been varied. Dallas Fed President Rob Kaplan thinks the Fed should start paring back purchases in October, while Chicago Fed President Charles Evans wants a few more months of jobs data."I keep thinking it's the Fed's attempt at clarity, by offering a variety of options as to when they will start the tapering process," said Sam Stovall, chief investment strategist at CFRA. "In a sense, it's trial balloons to keep the conversation going so the prospect of tapering is in the forefront of investors, so when it does occur it will not come as even the slightest shock."There aren't many speaking opportunities for central bank officials in the week ahead.
All data is taken from the source: http://cnbc.com
Article Link: https://www.cnbc.com/2021/08/13/the-rally-in-recovery-focused-stocks-could-depend-on-consumers-and-the-fed-in-the-week-ahead.html
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