Investors Hope To Snap Two Months Of Market Downturns Today

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(Friday Market Open) Stock futures gained in premarket action Friday ahead of a long holiday weekend and behind nearly two months of historic market losses stoked by inflation fears, interest rate concerns and ongoing geopolitical tensions. Before the open, investors got a shot of good news from a key report that showed inflation could be slowing.

Potential Market Movers

Investors look to wrap a sixth straight day of market gains in pre-holiday trading after digesting a week of mixed economic news on the state of the homebuyer and the retail consumer. Friday’s premarket news seemed a nice start to the weekend—the PCE Price Index showed that core inflation in April rose the expected 4.9% while personal income actually moderated a bit.

Known as the Federal Reserve’s favorite inflation index for policy matters, the core personal consumption index numbers were in line with expectations and finished below a 5.2% pace in March. However, core PCE inflation numbers don’t include food and energy, two key consumer costs on the rise.

Once the Memorial Day weekend is over, investors may want additional evidence from the Conference Board’s monthly Consumer Confidence Survey on Tuesday as to where the economy and the Fed’s battle plan could go next.

In premarket trading, S&P 500 futures gained another 0.1% early Friday, while the Dow Jones Industrial Average ticked up 0.1% and the technology-heavy Nasdaq-100 gained 0.4%. For the Dow specifically, investors are hoping today’s session cements the end of a historic eight-week decline. Stocks making news ahead of the market open:

Dell Technologies (DELL) stock was up over 9% before the bell after announcing better-than-expected earnings and revenues as business buyers are now speeding up their desktop and laptop computer purchases as offices accelerate reopenings.
Gap Inc. (GPS) shares slid nearly 20% premarket after a big miss on earnings Thursday. GPS said its Old Navy division missed the boat on merchandise mix for shoppers returning to the office and the inflation impact on its key lower-income customer.
Costco (COST) lost 1.3% before the open despite beating earnings and revenue estimates in the latest quarter though noting that its margins narrowed nearly 1% due to higher labor and freight costs.
Hibbett (HIBB) slid 6.5% premarket trading after a miss on its latest quarterly profit and sales estimates. HIBB said its shoppers had less money to spend now that COVID-19 stimulus payments have ended.

Right before the open, The Cboe Market Volatility Index (VIX) edged down to 26, still at a cautionary level, but closer to a sign of pre-holiday relaxation.

Reviewing the Market Minutes

After a tough month for retailers, the group bounced back a little on Thursday with some better-than- expected guidance and earnings from a few more top store names. The Dow Jones U.S. Retail Index rallied 4.22%, bolstered by Dollar Tree (DLTR) rocketing 21.9%, Macy’s (M), gaining 19.3%, Dollar General (DG) advancing 14%, and Williams-Sonoma (WSM) climbing 12.8%.

Retailers apparently got investors in a bargain-hunting mood because the major indexes rallied. The S&P 500 (SPX) jumped 1.99%, the Nasdaq Composite ($COMP) rallied 2.68%, and the Dow Jones Industrial Average ($DJI) rose 1.61%. Investors even went into small-cap stocks, pushing the Russell 2000 (RUT) 2.17% higher. Growth stocks appeared to be a slight favorite over value as the S&P 500 Pure Growth Index rallied 3.14% and the S&P 500 Pure Value Index rose 1.55%.

Investors favored recent beaten-down sectors with consumer discretionary, information technology and financials as the top three gainers, suggesting many investors view the market as oversold. However, all sectors were higher Thursday with the exception of real estate.

Investors also appeared to shrug off Thursday’s lower revision to Q1 gross domestic product (GDP). GDP had originally posted at -1.4% and was expected to be revised higher yesterday to -1.3% before being revised lower to -1.5%. However, this number is in the past and as of Thursday, the Atlanta Fed’s GDPNow model was forecasting Q2 GDP at 1.8%.

CHART OF THE DAY: BIG FIBS. The S&P 500 (SPX—candlesticks) has been uptrending since 2009. The index has only tested the 23.6% level of the Fibonacci Retracement tool which means that the index could pullback further. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Perspective: Sometimes it’s easy to forget in the middle of a busy news cycle about inflation, rising rates, and potential recessions that the S&P 500 (SPX) has been on an uptrend since 2009. The recent pullback has toyed with bear market returns—but taking a long-term look at the index helps to put stuff back in perspective.

Of course, some sectors of the market have been hit much harder and depending on how well you’ve diversified your portfolio, you may be feeling the pain a little differently. In fact, some have called it the “stealth bear market” because the number of stocks that have lost market cap value aren’t always reflected in the major indexes.

Homesick: It’s been a tough week for housing as economic reports have exposed some cracks in the housing market’s foundation. On Tuesday, the new home sales report plummeted an unexpected16.6% as the actual number of new homes sold returned to pre-pandemic levels. According to the Commerce Department, housing inventories nationwide have increased from six months to nine months.

On Wednesday we learned that the most recent MBA Mortgage Applications report dropped again and has now fallen nine out of the last 12 weeks. Mortgage applications are now down 35% from their January 27, 2021, high.

On Thursday, pending home sales fell 3.9% in April and have fallen nine out the last 12 months beneath pre-pandemic levels.

Housing is localized so nationwide numbers don’t always reflect what is happening where you live. The Fed had hoped to slow the housing market to help with inflation—here are signs of their success.

Dividends: A new research report from Credit Suisse (CS) finds that dividend stocks with the biggest payout ratios outperform stock buybacks. Buybacks have been criticized as a way for companies to inflate their stock prices, but others defend them as a different type of dividend.

However, the report notes that over a 20-year period, by sharing more of their earnings through dividends, companies have been able to provide better returns to their investors. Between December 31, 1999 to December 31, 2019, Credit Suisse found that dividend stocks returned an annual rate of 10.9% versus buyback stocks at 9.3%. The bottom third of dividend stocks returned 6.6%.

Notable Calendar Items

May 30: Markets closed for Memorial Day

May 31: Conference Board Consumer Confidence Survey and earnings from Salesforce.com (CRM), HP (HPQ), and Victoria’s Secret (VSCO)

June 1: ISM Manufacturing Index, JOLTs Job Openings, and earnings from Hewlett Packard (HPE), NetApp (NTAP), and Chewy (CHWY)

June 2: Earnings from Broadcom (AVGO), Lululemon (LULU), and Hormel Foods (HRL)

June 3: Employment Situation Report, ISM Non-Manufacturing PMI and earnings from Crowdstrike (CRWD) and DocuSign (DOCU)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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