It’s been a sleepy week in the markets for the major averages. Stocks flirted with old highs, then fell again at the end of the week. Energy and some meme stocks got the most attention.
Crude oil soared and neared $ 70 a barrel, dragging energy stocks with it. Energy traders were encouraged by the recent OPEC meeting. The cartel assumes that demand will exceed supply by more than a million barrels a day for the foreseeable future. Hence, members intend to gradually increase production as the world economy picks up pace. Most analysts expect oil to cross $ 70 a barrel before pausing.
Certain stocks like AMC and GameStop, dubbed “Meme” stocks by Reddit retailers, had an incredible week of gains. AMC, the largest theater chain in the country, for example, recorded a price gain of more than 100 percent in one day. The rise in prices eventually slowed and then reversed after the company announced two consecutive share issues over three days.
There is no fundamental reason to justify this type of price movement. I experienced the same thing during the Dot.Com boom (and bankruptcy) earlier this century. For those who can ride the bull, I applaud you. I just hope you are lucky enough to leave before you get trampled. Buyers beware.
Investors are also watching the infrastructure negotiations between the two political parties. The horse trade becomes intense. Reports that President Biden may be ready to revise his proposal to raise the corporate tax rate from 21 percent to 28 percent cheered the markets. That tax hike was a major obstacle to gaining Republican support for his infrastructure plan.
The Washington Post reported that Biden could consider a minimum tax rate of 15 percent instead. On the surface, this could be a tax cut from the current 21 percent. However, few companies pay the usual tariff (although politicians like to pretend they are). The actual tax, after all the offsets and loopholes in tax law, usually results in a payment that represents a significant discount on the stated tax rate. Some large companies don’t pay taxes at all.
Another indication that the Federal Reserve is seeing more signs of economic recovery is the Fed’s announcement that it will sell its $ 13 billion corporate bond and ETF portfolio (called the secondary market corporate credit facility it set up during the pandemic has) to prepare. Officials made it clear that this was a separate step and should not be viewed as a step towards tightening monetary policy.
The May 2021 non-farm payroll employment report announced on Friday was the second consecutive monthly disappointment. 559,000 positions were newly hired. That was far less than the expected 675,000, but bad news turned out to be good news for financial markets. Stocks rebounded as markets focused heavily on the tapering talk.
Some Federal Reserve Bank members continue to speak openly about the need to reduce fixed income purchases. However, other “pigeons” on the Federal Open Market Committee remain convinced that we need several months of data before we begin this process. The weak employment figures give credibility to Fed officials who want to move slowly.
Persistently loose monetary policy means interest rates should stay low, which is good for equity investments. And so the stock market rebounded on the “bad” news of non-farm payroll. At this point, after their committee meeting in mid-June, traders are expecting more about tapering from Fed officials with a possible announcement of when tapering will begin as part of the Fed’s annual Jackson Hole conference in August.
I believe the stock markets will continue to be a bull and bear battle. While summers are usually a slow period in the markets, I suspect we could see more turmoil and possibly more gains this year. That could keep the pros close to the terminals as we are pretty close to historical highs on the S&P 500 index. A break above this (at 4,238) would give the bulls a clear sail to 4,300. The question is, what new news could trigger this outbreak?
The cryptocurrency market, on the other hand, remains subdued. Bitcoin continues to trade in a range between $ 33,500 and $ 38,000. Technicians seem to wait their time before taking a step. Many believe that Bitcoin either has to drop critically below $ 33,000 to sell or above $ 40,000 for new purchases.
In the commodities space, copper, gold and silver lead this week after the US dollar bounced off its three-week lows while oil prices continued to rise. Volatility like this is the be-all and end-all when investing in cryptocurrencies, commodities, and commodity stocks. There’s a saying, “If you can’t stand the heat, get out of the kitchen” so invest accordingly.
Bill Schmick is registered as an investment advisor agent for Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401 or by email at billiams1948@gmail.com.