By Barbara Kollmeyer
Welcome to the month of June and a week that may wake investors from any early summer slumber, as it ends with a fresh update on U.S. jobs.
Stock futures are climbing after the long weekend, and as investors look past Friday’s data showing the Federal Reserve’s preferred measure of inflation surging to a rate not seen in 13 years .
Take note, the U.S. economy is running faster than an Indy 500 race, BTIG’s chief equity and derivatives strategist Julian Emanuel and equity strategist Michael Chu told clients in a note on Sunday. As evidence they cited second-quarter growth at 9%, “a flood of liquidity sending [an] update of the Fed’s reverse repo to all-time highs,” reopenings everywhere and numerous inflation signals.
“Despite the intensifying price and excess liquidity pressures and the historical evidence that sustained periods of Core PCE [personal consumption expenditures] over 2% have resulted in stock market declines averaging -1.6% per month, the Fed’s ‘Operation Grand Slam’ (the Fed’s balance sheet is approaching $8T) is engineering such inflation, and the Fed is going to get their wish for the next several months,” said the strategists.
In our call of the day , Emanuel and Chu offered up a “checkered flag” shortlist of stocks that can do well in this climate, and for these reasons: low price/earnings relative to their own 3-year history vs. SPX /zigman2/quotes/210599714/realtime SPX -0.61% , leading since the mid-February inflation inflection, yet have lagged behind year-to-date:
On that buy list are consumer-products group Colgate-Palmolive /zigman2/quotes/200774077/composite CL -0.59% , healthcare names Humana /zigman2/quotes/203095337/composite HUM +2.02% , Quest Diagnostics /zigman2/quotes/201001842/composite DGX +1.81% , DaVita /zigman2/quotes/204229673/composite DVA -1.79% , Cardinal Health /zigman2/quotes/206646342/composite CAH -2.08% , Cerner , drug companies Bristol-Myers Squibb /zigman2/quotes/202559280/composite BMY +0.11% and Pfizer /zigman2/quotes/202877789/composite PFE -0.68% , and real-estate investment trusts Realty Income /zigman2/quotes/200487782/composite O +0.21% and SBA Communications /zigman2/quotes/208397406/composite SBAC -0.67% .
As for the buyer beware or “pit stoppers,” list, BTIG strategists note these prospective underperformers that have the following factors in common: high price/earnings relative to the S&P 500 (top 50% of their own history over the last 3 years), lagged behind since the inflation inflection, yet have outperformed year to date:
Those names are manufacturer Generac Holdings /zigman2/quotes/208144117/composite GNRC -0.86% , semiconductor names Maxim , Nvidia /zigman2/quotes/200467500/composite NVDA -0.05% , Microchip Technology /zigman2/quotes/208326291/composite MCHP -1.02% and KLA /zigman2/quotes/209248041/composite KLAC -0.66% , Microsoft /zigman2/quotes/207732364/composite MSFT -0.61% and Intuit /zigman2/quotes/203136605/composite INTU -2.07% in the software space, and Arista Networks /zigman2/quotes/206966450/composite ANET -1.72% , Zebra Technologies /zigman2/quotes/201850708/composite ZBRA -1.85% , Trimble /zigman2/quotes/206026592/composite TRMB -2.26% and TE Connectivity /zigman2/quotes/205324491/composite TEL -0.59% in the tech hardware and equipment space.
Emanuel and Chu see increased likelihood that markets — via lower stocks and higher bond yields — will force the Fed to address the “potential for inflation expectations to become unanchored,” amid inflation forecasts that have been undershooting. If the S&P 500 pushes into the 4,250 arena, they suggested using it as an opportunity to cut exposure to prospective underperformers or set some index option hedges.
Waiting for OPEC+ and data
U.S. stocks /zigman2/quotes/210598065/realtime DJIA -0.10% /zigman2/quotes/210599714/realtime SPX -0.61% /zigman2/quotes/210598365/realtime COMP -1.00% are up , alongside European equitie s /zigman2/quotes/210599654/delayed XX:SXXP +0.21% and after a mostly positive day for Asian stocks. Gold is further atop the $1900 an-ounce level, while the yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.26% on the 10-year Treasury note is also rising. Surprisingly to some people, bitcoin /zigman2/quotes/31322028/realtime BTCUSD +0.28% didn’t crash over the weekend.
Oil /zigman2/quotes/209723049/delayed CL00 +1.61% is a big mover, surging to its highest levels since October 2018 after the Organization of the Petroleum Exporting Countries sticks to an agreement to gradually return 2 million barrels a day to the market through July.
The final Markit manufacturing purchasing managers index was revised up, while the Institute for Supply Management’s manufacturing index climbed on new orders, but with labor shortages an issue . Construction spending for April is still to come.
Chinese electric-car maker NIO /zigman2/quotes/204905836/composite NIO -2.32% says semiconductor shortages weighed on May deliveries. Elon Musk, chief executive of industry giant Tesla /zigman2/quotes/203558040/lastsale TSLA +2.52% , alluded to those pressures in a newish tweet:
Our chart of the day comes from the blogger behind The Market Ear , who highlights potential troubles from Asian COVID-19 outbreaks, including lockdowns in Malaysia, travel halted in China’s massive Guangzhou region, and struggles in Taiwan and Thailand to name a few. Of course, slow vaccine rollouts are an issue in some spots.
“The question is whether or not the current surge in Asian corona cases will spill over to new supply chain disruptions, which in turn risk feeding over to another pick up in global inflation,” said the blogger, who cautions markets aren’t pricing in the latter.
How to protect from a potential upset? The Cboe Volatility Index /zigman2/quotes/210598281/delayed VIX 0.00% , a popular gauge of future stock volatility, is well off its March highs. Long positions in the VIX are “starting to look like cheap hedges,” said the blogger. Here are three ways to trade that volatility via exchange-traded funds.
A cool $1 million could get you handwritten notes by Isaac Newton, one of history’s greatest minds.
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