Stock Market This Week: Five Themes to Watch

In the iconic film Jaws, Roy Scheider’s Sheriff Brody uttered the famous line, “You’re gonna need a bigger boat.” Essentially, a similar message must be reverberating around the hallways of the Federal Reserve. With key metrics regarding inflation turning out worse than anticipated, the central bank presumably must act aggressively beyond its prior scope of engagement. Unfortunately, this implication had poor results for the equities sector.

Last Friday, the benchmark S&P 500 dropped 0.72%, capping off a dour week for the index, dropping nearly 6% of market value. The technology-centric Nasdaq suffered even worse results, shedding 0.90% on the Sept. 16 session while losing about 6.6% for the prior week. Per analysis from CNBC, it was the worst week for both indices since June.

Moving forward, the Fed must surely understand that it can’t play nice with its policy of raising the benchmark interest rate. At the same time, it must walk a tightrope. Push the monetary lever too much in the hawkish direction and a recession could be the result. Don’t do enough, however, and inflation will remain out of control, leading to the long-term pain that Fed chair Jerome Powell insisted the U.S. economy must avoid.

On top of that, other segments of the global economy will simply not cooperate. Circumstances are becoming increasing eventful, leading to much anxiety on Wall Street. Here are the five themes to consider for the coming week.

Rising Inflation Puts Fed in a Quandary

According to The Wall Street Journal, the Labor Department last Tuesday reported that its consumer price index increased by 8.3% in August from the year-ago period, representing the highest inflation rate in four decades. Further, on a monthly basis, “the core CPI rose 0.6% in August—double July’s pace.”

“These data are hot and are a reflection of feed-through of higher energy prices from earlier this year. Inflation is a stubborn thing,” said Jamie Cox, managing partner for Harris Financial Group, in a statement.

Unfortunately, this stubbornness also means that the Fed has its work cut out for it. In late August, Fed chair Powell delivered his monetary policy speech at the annual economic symposium at Jackson Hole, Wyoming. Although he acknowledged that higher borrowing costs will impose “some pain” to the economy, he noted that failing to act appropriately would lead to long-term consequences.

Now, the central bank most likely needs to push the accelerator a bit more. As Barchart contributor Rich Asplund mentioned, FedEx (FDX) suffered a catastrophic loss last week as the courier service released preliminary results for its fiscal first-quarter earnings report that came in well below consensus expectations.

Specifically, the concern is that should inflation continue to run rampant, consumer sentiment will suffer a beating. Nevertheless, the Fed must maintain discipline to avoid delivering a rough landing for the economy.

Defense Stocks to Cynically Attract Attention

While the war in Ukraine following Russia’s brazen invasion remains far from over, a significant shift in momentum occurred over the past several days. As multiple mainstream news agencies reported, Ukraine launched a massive counteroffensive in the east, liberating significant chunks of territory.

Further, the AP stated that “Ukraine's quick action to reclaim Russia-occupied areas in the northeastern Kharkiv region forced Moscow to withdraw its troops to prevent them from being surrounded and leave behind significant numbers of weapons and munitions in a hasty retreat as the war marked 200 days on Sunday [Sept. 11].”

Though an embarrassing battlefield defeat for the Russians, the consequences could reach much further beyond the borders of the two Slavic nations. Recently, CNN reported that 24 people had been killed on the Kyrgyzstan-Tajikistan border, amid the latest fighting to hit the former Soviet Union.

Put another way, the loss of status for Moscow appears to be creating a power vacuum, with several longstanding historical tensions rising to the top. Cynically, such a framework may put a bright focus on major defense stocks.

Not only do investors need to be concerned about the conflict in Ukraine, the geopolitical spillover effect could launch several ugly dynamics. Sadly, the framework means market participants have no time to relax.

Energy Markets on Watch

Over the past several weeks, Americans have enjoyed relief on a relative scale. While fuel costs remain historically high, they dipped from their peaks, helping to mitigate the overall shock of rapidly rising inflation. However, it appears that this respite will eventually fade.

Recently, Treasury Secretary Janet Yellen warned of possible price spikes toward the end of this year, according to USA Today. “This winter, the European Union will cease, for the most part, buying Russian oil, and in addition, they will ban the provision of services that enable Russia to ship oil by tanker,” Yellen said in a CNN interview on Sunday. “It is possible that could cause a spike in oil prices.”

Moreover, with Russia cutting gas to Europe, the Kremlin has effectively weaponized hydrocarbon energy supplies. Globally, then, with a large portion of critical commodities cut off to western powers, the price of energy will likely swing higher.

With few options available, the market signals may inspire astute investors into acquiring shares of energy stocks, particularly those tied to natural gas.

Cryptocurrency Prices Disappoint

After the much-discussed pivot for a major blockchain project transitioning to a proof-of-stake consensus mechanism was finally completed, many onlookers hoped for a sizable swing higher in the cryptocurrency sector. Sadly, though, the narrative so far has turned into a nothing-burger, at least as far as market valuations are concerned.

For instance, roughly between Sept. 13 through Sept. 16, the total market capitalization of all cryptos declined by more than 11%. At time of writing, the total market cap stands at around $975 billion. The much-hyped event failed to spark bullish momentum, though arguably the warning signs were evident that the consensus mechanism transition would disappoint.

Around a month ago, this Barchart content series warned investors about the concept of “buy the rumor, sell the news.” Essentially, with so many people betting on the same horse, the subsequent rewards would have been limited. As well, the transition represented a well-known fact. Typically, investors trade on what will be, not what is.

That’s not to say that cryptos can’t move higher because they most certainly can. However, the soft price action is a reminder to be careful about banking on groupthink.

Earnings in Focus

As you might expect, the earnings disclosures for the coming week will be light. Nevertheless, some companies will be reporting their results that may offer insights into the broader economy. First up on Monday, AutoZone (AZO) will release its quarterly financials, with analysts expecting the company to deliver earnings per share of $38.50. With the average age of vehicles on U.S. roadways hitting a record 12.2 years, AutoZone might deliver positive results.

Next, on Tuesday, KB Home (KBH) will deliver its quarterly report. Analysts anticipate that the company will post an EPS of $2.67. From a fundamental perspective, the homebuilder will likely bring to the table insights about homebuying demand amid sharply rising borrowing costs.

Also on Tuesday, General Mills (GIS) will release its financials. Wall Street expects that it will post an EPS of 99 cents. As a popular food company, General Mills should weather inflationary pressures better than discretionary names. However, it will be interesting to hear what management has to say about consumer sentiment.

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