Virus Outbreak

A sign for workers hangs in the window of a shop along Main Street in Deadwood, S.D. U.S. employers added 559,000 jobs in May, the second monthly disappointment in a row, but bad news proved to be good news for the financial markets.

It was a sleepy week in the markets for the major averages. Stocks flirted with the old highs, only to fall back by the end of the week. Energy and a few meme stocks occupied most of the attention.

Crude oil spiked higher, nearing almost $70 a barrel, pulling energy stocks along with it. Energy traders were heartened by the latest OPEC meeting. The cartel expects demand to outstrip supply by more than a million barrels a day for the foreseeable future. As a result, the members intend to gradually increase production as the global economy gathers steam. Most analysts expect oil to breach $70 a barrel before taking a break.

Certain stocks such as AMC and GameStop, which have been dubbed “meme” stocks by the Reddit crowd of retail traders, had an unbelievable week of gains. AMC, the nation’s largest theater chain, for example, saw its stock gain by more than 100 percent in one day. The price rise finally slowed and then reversed after the company announced two consecutive stock offerings over three days.

There is no fundamental reason to justify this kind of price movements. I witnessed the same thing during the Dot.Com boom (and bust) back in the beginning of this century. For those who can ride the bull, I applaud you. I just hope you are lucky enough to exit before you get trampled. Buyers beware.

Investors are also watching the infrastructure negotiations between the two political parties. The horse trading is getting intense. Reports that President Biden might be willing to revise his proposal to increase the corporate tax rate to 28 percent from 21 percent cheered markets. That tax hike has been a major roadblock in winning Republican support for his infrastructure plan.

The Washington Post reported that Biden might consider a minimum corporate tax rate of 15 percent instead. On the surface, that might seem to be a tax cut from the present 21 percent rate. However, few corporations pay the going rate (although politicians like to pretend they do). The actual tax, after all the credits and loopholes in the tax law, usually results in a payment that is a substantial discount to the stated tax rate. Some large corporations pay no tax at all.

Another indication that the U.S. Central Bank sees further signs of economic recovery is that the Fed announced it was preparing to sell its $13 billion corporate bond and ETF portfolio (called the Secondary Market Corporate Credit facility, which it established during the pandemic). Officials made it clear that this was a separate move and should not be considered as a move toward tightening monetary policy.

May’s Non-Farm Payroll employment report for May 2021, which was announced Friday, was the second monthly disappointment in a row. New hires came in at 559,000 jobs. That was far lower than the 675,000 expected, but bad news proved to be good news for the financial markets. Stocks rallied since markets are keenly focused on the “tapering” conversation.

Some Federal Reserve Bank members continue to talk openly about the need to start tapering purchases of fixed income assets. Yet, other “doves” on the Federal Open Market Committee remain convinced that we need several more months of data before beginning that process. The weak employment numbers give credence to those Fed officials who want to go slow.

Continued, easy monetary policy means interest rates should remain low, which is good for equity assets. And so the stock market rallied on the Non-Farm Payroll “bad” news. At this point, traders are expecting to hear more about tapering from Fed officials after their mid-June committee meeting with a possible announcement on when tapering will begin around the Fed’s annual Jackson Hole conference in August.

Equity markets, I believe, will continue to be a battle between bulls and bears. While summers are usually a slow period in the markets, I suspect this year we could see further turbulence and possibly further gains. That could keep the pros close to the terminals, since we are quite close to historical highs on the S&P 500 Index. A break above them (at 4,238) would give the bulls clear sailing to 4,300. The question is what new piece of news could trigger that breakout?

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 be biding their time before making a move. Many believe Bitcoin must either break decisively below $33,000 to sell it, or above $40,000 for new purchases.

In the commodities corner, copper, gold, and silver took it on the chin this week after the U.S. dollar bounced off three-week lows, while oil continued to rally. Volatility like this is the name of the game when investing in cryptocurrencies, commodities and commodity stocks. There is a saying “If you can’t stand the heat, get out of the kitchen,” so invest accordingly.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401, or email him at billiams1948@gmail.com.