Investors bid up cyclical stocks in the past week, but the economy will have to prove that the reflation trade — a bet on economic growth — is the way to go as concerns about Covid linger.
Markets are deep in the dog days of August. That means the Federal Reserve and key data, particularly retail sales, could provide some direction for stocks in the week ahead.
The reflation trade
Materials were up 2.7% for the week in Friday trading, and industrials were up 1.4%. Financials, which do best when rates are higher, were up 1.9% for the week. Tech, which underperforms when rates rise, was flat with a slight gain of less than 0.1%.
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“I do think there will be a resurgence of the reflation trade. I do think you can buy some of the cheap cyclicals,” said Adam Parker, founder of Trivariate Research. Parker said he likes materials, metals, mining and some energy.
Treasury yields had been moving higher after stronger jobs and inflation data. But they were kicked into a higher gear by comments from a parade of Fed speakers, who all shared their views on what it would take for the central bank to wind down its bond-buying program.
The Federal Reserve has been purchasing $120 billion of Treasury bonds and mortgage-backed securities to prop up the economy and provide market liquidity during the worst days of the Covid pandemic.
Focus on consumers
A flurry of retail news in the week ahead will put market focus on the consumer, the driver of 70% of the U.S. economy. The Census Bureau will release July’s monthly retail sales report Tuesday morning, and Dow Jones forecast is for a decline of 0.2%. That same day, retail heavyweights Walmart and Home Depot report earnings.
Trivariate’s Parker said the market will focus on the data, including retail sales and industrial production on Tuesday and jobless claims Thursday. There are also the Fed’s Empire manufacturing data Monday and the Philadelphia Fed survey on Thursday. If the data continues to look strong, it supports the reflation trade.
“I do think that trade will work again for part of the fall,” Parker said.
Week ahead calendar
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