Traders work on the trading floor of the New York Stock Exchange.
Inflation data is a highlight of the week ahead as investors focus on economic news in the void between the reporting season and the next Fed meeting.
The consumer price index for May is slated to be released on Thursday and it could get hot after rising in April. Inflation is seen as a major trigger that could cause the Federal Reserve to step back from its loose policy if rising prices appear hotter and more persistent than expected.
Stocks have been higher for the past week, but meme stocks have been a lot hotter. AMC Entertainment was up an additional 83% for the week, even after declines at the end of the week.
The energy sector did the best, up more than 6.7%, as oil prices rose nearly 5% over the past week. REITs performed second best, up 3.1%, followed by financials, up 1.2%, and technology, up 1.2%.
But it’s meme stocks that hit the headlines and also added to concerns about the foam in the stock market.
“People think this is new. It’s not at all,” said Dan Niles, founder of the Satori Fund, of the trading frenzy. He noted that there was a similar foam in individual stocks in 1999 when companies added their name dot-com to get investor attention.
“What is new is the fact that these traders have stimulus checks. They can more easily organize themselves on things like WallStreetBets, they can work from home, and there is free trading. Those are the differences,” Niles told CNBC.
“So if people are interested in investing, that’s great. What I don’t like is when people take out mortgages on their house and put themselves at risk if this thing collapses,” he added. “You want to be able to invest what you can afford to lose playing in something like this.”
Steve Massocca, managing director at Wedbush Securities, said trading names like GameStop and Bed Bath & Beyond was one of the things that made him more cautious about the market. He said the meme names’ high ratings are unlikely to last. “It will exist as long as there are cicadas,” he said, referring to the insect that lives just a few weeks above the ground after having lived up to 17 years underground.
The S&P 500 gained 0.6% last week to climb to 4,229, just 9 points from its all-time high. The Dow rose 0.7% to 34,756 and the Nasdaq rose 0.5% to 13,814.
Watch the signs of inflation
Massocca said investors should continue to focus on things like inflation as it could be the reason the Federal Reserve is reversing its simple policy. The Fed has so far stated that it views the higher inflation data as temporary.
According to the Dow Jones, economists expect the consumer price index to rise 4.7% yoy, after 4.2% in April. Core inflation is expected to rise 0.4% over the month and 3.4% year-on-year.
“I get nervous. I see signs of a peak. I systematically raise cash. I think the market looks too expensive,” said Massocca. “We’re going to shake off the dust from Covid. The economy will be very, very good and in general I think monetary policy will react to some extent.”
He said the memes mania was just a sign, but the spark for a sell-off could be anything, including a restrictive comment from the Fed.
“Who knows what it is, but the kindling is building up, and once a match hits the market will eventually prepare for a 7-10% retreat,” he said. “Who knows where it starts … One of the candidates is very likely to be some kind of monetary policy cut.”
Fear hung above the market that the Fed would step back from its loose policy.
Friday May’s employment report was watched closely, but the lower-than-expected employment gains confirmed that the Fed may hold back on policy changes for the time being. In May, 559,000 jobs were added, well below the 671,000 expected.
Now the next focus is on the CPI report, ahead of the Fed’s November 15-16 meeting. June. The question is, is it getting so hot that the central bank may need to reconsider its views on the transitory nature of inflation, or could it show that price increases are peaking?
“There is inflation out there. You can see that everywhere,” said Massocca.
The market had expected the Fed to begin talking about withdrawing its bond purchases later this year, with many strategists targeting the Fed Symposium in Jackson Hole, Wyoming, in late August. The Fed is expected to discuss cutting its purchases first months before taking action. Then it will slowly reduce its purchases.
Thereafter, interest rate hikes could be considered, which the market does not expect until 2023.
Niles said the trend in meme stocks was partly fueled by the Fed. Markets are flooded with liquidity as the central bank keeps interest rates at zero and maintains monthly purchases of at least $ 120 billion in government bonds and mortgages.
“If the Fed pulls out of that tapering, I think you can then go in and say, ‘OK’, close out some of that free money,” he said. “From that point on it will be dangerous down.”
Niles said he is staying away from the names that are heavily sought after by retail investors or have a keen interest in short and that are being targeted by Wall Street for the time being. “You want to stay away from this stuff now, unless you do it in a very small size,” he said.
There is little income in the coming week. One of the few names reported on Wednesday is the meme name GameStop. Campbell Soup also reports from that day and Chewy reports from Thursday.
The G-7 Treasury Ministers are meeting this weekend and President Joe Biden will attend a meeting of the organization’s leaders in Cornwall, England, on Friday.
Calendar for the week in advance
Merits: Vail Resorts, Marvell Tech, Stitch Fix, Coupa Software
3:00 p.m. Consumer Credit
Merits: Thor Industries, Casey’s General Store, Navistar
6:00 am NFIB Small Business Survey
8:30 a.m. international trade
10:00 a.m. JOLTS
10:00 a.m. Quarterly Financial Report
Merits: Campbell Soup, GameStop, Brown-Forman, United Natural Foods, RH, Bradley
10:00 a.m. wholesale
Merits: Chewy, Dave & Buster’s, Seal Jewelers, John Wiley
8:30 a.m. initial applications
8:30 a.m. CPI
10:00 am Quarterly Services Survey
2 p.m. federal budget
10:00 am consumer sentiment