After all, May was not as bad a month for stock investors as it seemed due to an increase in volatility related to market participants’ expectations of impending inflation. The general Wall Street adage – sell in May and go away – has failed this year.
Major indices such as the Dow and the S&P 500 gained 1.9% and 0.6% respectively. The small-cap-centric Russell 2000 gained 0.1%. However, the teaching-intensive Nasdaq Composite was down 1.5% on inflation issues. In particular, the market’s fear meter – the CBOE VIX – fell nearly 10% in May after soaring 55.5% on May 13 from April 30.
In the meantime, investors are worried about June. Historically, June is one of the weakest months on Wall Street. According to the Bespoke Investment Group, the Dow was up 0.12% in June over the past 50 years. The index was positive 52% of the time in June. In addition, over the past 20 years, the blue chip index ended positively in June only 40% of the time.
Positive for June
The US economy is recovering very strongly. The manufacturing industries, which did well during the pandemic, are maintaining their impressive performances. The service sector, which was hardest hit during the pandemic, has rallied strongly since the beginning of this year.
The labor market, one of the most pandemic-havoc on the US economy, has systematically recovered over the past six weeks. Indeed, US companies are currently suffering from a shortage of skilled workers. In this context, the May job report to be published on June 4th will be of immense importance.
The number of new coronavirus cases is currently the lowest. The US government is aggressively using COVID-19 vaccinations nationwide. Most of the businesses that have closed due to bans have reopened with new social distancing norms.
In addition, the US consumer optimism indices remained elevated despite recent concerns about inflation. The pent-up demand is driven by astonishing personal savings.
Negatives for June
On the other hand, the impending inflation is the main concern of market participants. On May 28, the Labor Department reported that core PCE inflation (excluding volatile food and energy prices) rose 0.7% in April. Year after year, core PCE inflation – Fed’s most popular inflation measure – rose 3.1% in April, after rising 1.9% in March. This was the highest monthly profit in 13 years. The number was well above the Fed’s key rate of 2%.
On May 12, the Labor Department reported that the consumer price index (CPI) – popularly known as household inflation – rose 4.2% yoy in April, its highest level since September 2008. The CPI rose month after month after rising by 0.8% 0.6% in March. Core CPI (excluding volatile food and energy products) rose 0.9% in April after rising 0.3% in March. This was the largest monthly increase since 1981.
The Fed will hold its next FOMC meeting June 15-16. The decision made will have a huge impact on the stock markets. So far, the central bank has maintained its position that inflation will be temporary in 2021. However, it has signaled that the Fed may consider adjusting its policy variables if the economic recovery remains faster than expected and the price level continues to rise.
The first will be the phasing out of the $ 120 billion monthly quantitative easing program. A reduction in bond purchases will reduce the demand for bonds. As a result, prices will fall and the yield will rise until maturity. This will increase the market’s risk free rate.
How to invest
Currently, June is balanced with both positive and negative factors. At this point, it is advisable to invest in large-cap stocks (market capital> $ 40 billion) under certain conditions.
First, these companies generally have an established business model and brand name. Second, these companies are regular dividend payers with a current dividend yield of> 2%. This will serve as a source of income during the market downturn.
Third, these stocks have strong growth potential for the remainder of 2021. Fourth, these companies have seen solid earnings estimates revisions over the past 7 to 30 days, suggesting a robust business outlook for the near future. Fifth, these stocks have a long-term growth rate (3-5 years) that is above the benchmark S&P 500 index.
After all, these stocks must have either a Zacks rank of 1 (strong buy) or 2 (buy). You can see The full list of today’s Zacks # 1 Rank stocks can be found here.
Some of the stocks that fall under this category are Southern Copper Corp. SCCO, Dow Inc. DOW, The Home Depot Inc. HD, The Blackstone Group Inc. BX, Air Products and Chemicals Inc. APD and Marathon Petroleum Corp. MPC.
The following graphic shows the price development of six of the stocks mentioned above since the beginning of the year.
Image source: Zacks Investment Research
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