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Stock Market This Week: Five Themes to Watch

Barchart - Sun Aug 14, 8:00AM CDT
Stocks-Money-Rates - Pile of Money

Following significant concerns about recession fears impacting the equities sector, the U.S. stock market is so far proving its resilience. On Friday, the major indices all pinged green ink, with the benchmark S&P 500 gaining 1.7%. In addition, the Nasdaq led the charge heading into the weekend, moving up a hair over 2%, while the venerable Dow Jones gained about 1.3%.

Over the past week, the S&P 500 increased by 2.3%. In the trailing month, the index is up a very robust 13%, implying a possible return to bullishness. On a year-to-date basis, the benchmark gauge has dropped about 11%, thereby effectively halving earlier volatility. From the perspective of technical analysis, a 50% retracement represents a significant milestone.

Deploying the principles of Fibonacci retracements, investors will likely be targeting the 4,400-point level for the S&P 500. This demarcation aligns with the 61.8% retracement of this year’s downturn. As well, this level coincides with a prior support line before the equities sector suffered its spring season meltdown.

Nevertheless, myriad challenges await the global markets. Therefore, before anyone places significant wagers, it’s best to consider these five themes to watch this week.

The House Passes the Inflation Reduction Act

After significant wrangling and last-hour negotiations, the House of Representatives on Friday passed a sweeping tax, health and climate bill called the Inflation Reduction Act. By narrow margins, the $430 billion package passed the lower chamber of Congress: all Democrats supported the bill while every Republican opposed it. This pivotal piece of legislation will now head to President Joe Biden’s desk for his signature.

For the Democrats, the move represents a significant achievement just months before the critical midterm elections. Understanding the serious implications of the juncture – with Biden’s approval rating falling – left-leaning policymakers put aside their relatively minor differences to push through their party’s core agenda.

While the Inflation Reduction Act represents a much-needed win for Democrats, it may have little effect on the namesake condition. According to the AP, the landmark proposal might not tame price spikes, at least not in the immediate future. Indeed, the news agency states that the legislation “won't directly address some of the main drivers of surging prices — from gas and food to rents and restaurant meals.”

Therefore, investors will want to be careful about reacting aggressively to the news. Inflation may be a slow grind, with few readily viable answers.

Jobs Up, Participation Down

Among the recent upside catalysts for the equities sector was the July jobs report. Despite raging inflation and anxiety about a possible recession, employers created 528,000 jobs last month , more than double market expectations,” according to the AP. “That's the fastest pace of hiring since February.”

While indicators regarding employment represent closely watched gauges, the July report was particularly critical. As the AP mentioned, rising fears of a recession suggested that some investors would consider hitting the “sell” button. Obviously, that didn’t happen. Nevertheless, the news wasn’t comprehensively positive as it also meant that the Federal Reserve must act more aggressively regarding its monetary tightening.

Still, another factor exists that didn’t garner much airtime: the labor force participation rate. This metric slipped to 62.1% in July from 62.2% a month earlier. Reuters recognized the contrasting data point, noting that this “mostly reflected a drop in participation by teenagers.”

It’s important to realize, however, that the participation rate has been generally declining since March 2022. Further, the rate is well off from the 63.4% figure posted in February 2020 – just before the COVID-19 pandemic.

Geopolitics Strikes Again

Earlier this month, House Speaker Nancy Pelosi arrived in Taiwan, reaffirming U.S. support for the breakaway island which China claims as its own territory. According to Reuters, it was the highest-level visit by the U.S. to Taiwan in 25 years. Prior to the visit (which was not broadcasted until the action took place), Beijing warned the White House against what it perceived as a provocation.

In response, China fired missiles near Taiwan as part of a military exercise. Japan stated that five Chinese missiles landed in its territorial waters, escalating an already tense environment. After the cessation of the exercises, Reuters reported on the morning of Aug. 13 that 13 Chinese air force planes crossed the Taiwan Strait’s median line, per Taiwan's Defence Ministry.

Moving forward, U.S. policymakers must contend with two major geopolitical flashpoints, adding more headaches to the embattled Biden administration. Since Russia’s military aggression against Ukraine continues unabated, should Beijing ratchet up the pressure, Washington may find its resources stretched.

Cryptos Rise But Questions Remain

Undeniably, the cryptocurrency sector represented one of the most remarkable developments in the broader capital markets in 2021. At its peak in November, the total market capitalization of all cryptos was just under $3 trillion. For context, that would make the digital asset market the fifth biggest economic power.

Unfortunately for stakeholders, the party soon collapsed. At one point this year, the total crypto market cap slipped below the $800 billion level. Since then, however, the bulls reentered the scene, driving up valuations. In the late evening of Aug. 13, the sector’s total market cap traded around $1.17 trillion.

Now, the question is, can cryptos swing higher? Dominating the news cycle for digital assets is the concept of major virtual currencies switching their network protocol from the energy intensive proof of work to proof of stake. Once the transition takes place, cryptos will become less of an environmental burden, opening doors for broader integration.

While intriguing, the development could be an example of buy the rumor, sell the news. In other words, if everyone bets on the same horse, the subsequent reward may be very limited.

Earnings in Focus

This week will feature another stacked lineup for key earnings report, starting on Monday when real estate broker Compass (COMP) discloses its results. Covering analysts anticipate that the company will post a loss of 1 cent per share. Primarily, though, investors will tune in to seek clues about sentiment in the housing market.

On Tuesday, virtually everyone will tune in to hear the financial breakdown for big-box retailer Walmart (WMT). Analysts on average expect the company to report earnings of $1.60 a share, which would represent a 10.1% decline on a year-over-year basis. As a real-time sentiment barometer for the consumer economy, Walmart could easily influence the broader equities sector.

On the same day, analysts will go over the results of Home Depot (HD). A huge winner following the doldrums of the pandemic, this year hasn’t been too kind for HD stock. Nevertheless, shares have been rising over the trailing month, with its financial performance likely to influence the trajectory of the price action.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.