Stocks and index ETFs started the week with losses, as the technology sector drove the major benchmarks lower under Monday, adding to the downside pressure from the prior week’s higher-than-expected inflation readings.
The Dow Jones Industrial Average and the S&P 500 fell 0.6% apiece, while as the tech sector pulled back 0.7%. The Nasdaq Composite continued to lead the major indices lower, dropping almost 1%.
With rising inflation and interest rate pressure, technology stocks have been declining since mid-April. Continuing losses from last week, Apple and Facebook each fell more than 1%, as Netflix dropped 1.35%, helping to drive the Vanguard Information Technology ETF (VGT) 1.22% lower as well.
Meanwhile, investors and traders have been transitioning from growth stocks to cyclical stocks recently, and concentrating on investments in the energy, financial, and materials sectors. The moves have been beneficial for ETFs like the Energy Select Sector SPDR Fund (XLE), which gained 0.85% as crude oil rallied yet again.
Despite broader communication sector losses, shares of Discovery and AT&T increased, after news of a merger agreement. AT&T announced Monday that it is continuing discussions about merging WarnerMedia, which includes HBO, with Discovery. The new entity will trade as its own public company.
Last week, the S&P 500 fell 4% through midweek amid worries over hot inflationary data. But the broad key index eventually recovered much of the lost ground, to finish the week just 1.4% lower. The Nasdaq Composite, meanwhile, shed 2.3% last week, while the Dow fell 1.1% in that period. All three benchmarks recorded their worst week since late February.
Now analysts are considering whether the heightened volatility and increasing downside might portend a larger decline.
“Not only are [last]week’s events a warning sign of how uncomfortable inflation prints can become but also a warning sign of how overbought equity markets have become,” Nikolaos Panigirtzoglou, a managing director at JPMorgan, said in a note.
Inflationary data, in the form of the Consumer Price Index, revealed that prices surged 4.2% from a year earlier in April, the fastest rate since 2008, catalyzing concern that the Federal Reserve might be pressured into tapering its easy monetary policy earlier than expected.
The Fed’s minutes from its last meeting, which will be released Wednesday, might provide insight into the Central Bank’s plans.
“I think what we’re seeing as a trend is that we know eventually, there’s going to be a tapering of purchases by the Fed and we’re going to start hearing that. And I would expect that to happen sooner [rather than]later as we have these inflation concerns,” Loreen Gilbert, WealthWise Financial CEO, told Yahoo! Finance. “I would expect some volatility in the markets over the next few months as we’re in this transitory time of figuring out where are we going.”
Other key economic data illustrated an economy in the throes of a “violent recovery,” amid inflationary pressures and lofty stock valuations, according to at least one financial pundit.
“What we had with the last jobs report was a pretty good bump in wages month over month but weak job growth. And so, that does speak to some of these supply-side shocks hitting the economy,” MKM Partners Chief Economist and Market Strategist Michael Darda explained. The last jobs report showed the U.S. economy gained 266,000 jobs in April, or well below the 1 million job gains expected. “I think a lot of those are going to self-resolve over the course of the months and quarters ahead.”
“There is some inflationary pressure. But that also followed deflationary pressure in the CPI about a year ago,” he added. “So one way to cut through the noise is to just look at where these data points are – whether it’s jobs, GDP or inflation – relative to the pre-COVID trend growth path. Because we had a huge collapse, now we’ve had a violent recovery.”
“We’ve seen the economy is in a V-shaped recovery but we still have a lot of jobs to make up. Inflation is moving up now but it’s a little less than 1% above its pre-COVID trend growth path. So we’ll see where the rest of the year plays out,” he said. “We’re pretty optimistic on the economy. We’re a little more cautious on risk markets particularly the Nasdaq, and what would be represented by high valuation growth stocks. I think in this environment with valuations up where they are, there’s some real risk there.”
Meanwhile, the first quarter earnings season is almost completed. Thus far, 86% of S&P 500 companies have reported a positive EPS surprise, which could mark the highest percentage of positive earnings surprises since 2008, when FactSet began tracking this metric. Analysts are still questioning whether the earning data is really as stellar as it appears though.
“Investor and equity analyst reactions to earnings results reveal skepticism that 1Q beats provide a reason for additional forward-looking optimism,” wrote David Kostin, Goldman Sachs’ chief U.S. equity strategist. “Firms that beat EPS estimates typically outperform the S&P 500 by 100 [basis points]the day after reporting. However, the typical stock that beat on EPS this quarter outperformed by just 51 [basis points], continuing the trend from 2020.”
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