Stock Market This Week: Five Themes to Watch

Throughout much of the prior week, both bulls and bears engaged in a tight battle for supremacy. While no one delivered the knockout blow just yet, circumstances don’t look particularly encouraging for the optimists. On Friday, the benchmark S&P 500 index dropped 2.4%, sending the overall performance for last week in the red to the tune of 1.2%.

For the technology-centric Nasdaq Composite, it fared even worse. For the session heading into the weekend, the index dipped slightly more than 3%. For the week, it found itself below parity by 2.4%. Dominating affairs were lingering concerns about how the Federal Reserve will handle the ongoing inflation crisis.

Do nothing and the broader economy could struggle under the weight of rising prices. Go aggressive with monetary tightening and the economy may easily slip into recession. However, with few good options on the table, many investors decided to reduce their risk exposure.

No matter what, market participants will need to keep a close eye on major catalysts. Here are five themes to watch for the upcoming week.

Inflation Remains a Vexing Problem

While the equities sector appeared to gain significantly positive momentum last Thursday, the next day’s session again put the major indices on a bearish trajectory. Here, the main culprit centered on rising expectations of higher prices.

According to Barchart contributor Rich Asplund, the “University of Michigan U.S. Oct consumer sentiment rose more than expected to a 6-month high.” However, inflation expectations “rose to 2.9%, stronger than expectations of 2.8%.”

“’Comments Friday from San Francisco Fed President [Mary C.] Daly were hawkish for Fed policy and bearish for stocks when she said, ‘the most likely outcome’ is for the Fed to raise interest rates to between 4.5% and 5.0% and to ‘hold at that point for some period of time’ following a U.S. inflation reading that was ‘very disappointing,’” added Asplund.

With the Fed likely monitoring these important economic datapoints, it may decide to raise the benchmark interest rate even higher. Though this action should help control runaway inflation, it may hurt the economy in the near term, thus worrying investors.

Energy Crisis May Worsen

Earlier, one of the biggest moves in the energy sector involved the OPEC+ decision to “cut its collective output by -2.0 million [barrels per day] for November and December, a bigger cut than expectations of -1.0 million bpd,” per Asplund. The action represented a significant blow to the Biden administration, with the President earlier this year discussing with Saudi Arabia about implanting production increases.

On Oct. 13, crude prices managed to rally despite increases in crude inventories stemming from the “movement of U.S. emergency stockpiles” into commercial storage. This pricing dynamic underscores the fresh geopolitical battle between the U.S. and Saudi Arabia.

For President Joe Biden, the stakes are high. At a sensitive moment in world affairs, the U.S. cannot afford to lose credibility on the international stage. As well, Biden’s Democrats are facing a pivotal battle with Republicans for control of Congress in the upcoming midterm elections.

Still, the Saudis have their own ambitions, which may mean higher energy prices in the near term.

Defense Stocks in the Crosshairs

Another factor that could heavily influence energy prices in the months ahead is Russia’s invasion of Ukraine. Despite a shock blitzkrieg in late February followed by extensive artillery shelling, Russian forces find themselves increasingly on the backfoot.

Recently, Ukrainian military command stated that it recaptured several settlements in southern Kherson as part of another counteroffensive. Earlier, Ukraine made significant gains in the country’s northeast region.

Of course, the current battleground situation represents significant embarrassments for Russian President Vladimir Putin. Unlike a quick invasion and annexation that he probably envisioned, the war has dragged on for several months, forcing the Kremlin to initiate a partial mobilization. Now, regular Russian citizens no longer have the privilege of plausible deniability.

Moving forward, defense stocks may represent a cynical area to focus attention on. With the conflict unlikely to end soon and with Ukrainians needing more military hardware to complete its liberation campaign, publicly traded companies tied to this sector may benefit from an extended upside pathway.

Cryptos Face Troubled Waters

Inarguably one of the hottest market sectors of 2021, the cryptocurrency market sings a different tune this year. At time of writing, the total market capitalization of all digital assets sits at a little over $917 billion. As a reminder, at its peak in November last year, cryptos were surging toward the $3 trillion mark.

Fundamentally, the longer cryptos meander at deflated levels, the likelier it is that a capitulation will occur. Right now, the culprit is the Fed along with other international central banks seeking to buttress their fiat currencies. As these institutions unwind the easy monetary policies of the past, the global money supply will tighten, which will have a significant impact on purchasing power.

During inflationary cycles, the erosion of purchasing power means that market participants were encouraged to invest because bad money chased after (potentially) good money. Under a deflationary cycle, the opposite becomes true. If you invest, there’s a risk of chasing bad money with good money.

Unfortunately, that’s why cryptos are struggling – they’re on the wrong side of the bad money fence line.

Earnings in Focus

Unlike prior weeks, earnings disclosures are heating up, with several major market-influencing companies set to disclose their quarterly results. First up on Monday, Bank of America (BAC) will release its quarterly report, with covering analysts anticipating that the financial institution will deliver 78 cents per share. Market observers will be keen on listening for clues about how the Fed’s rate hike initiatives have impacted its business.

On Tuesday, streaming giant Netflix (NFLX) will release its third-quarter report. Consensus estimates call for the company to deliver earnings per share of $2.13. Much of the focus will center on Netflix’s ability to regain lost subscribers. Also, anticipation brews about the company’s recent announcement of an advertisement-driven subscription tier.

Finally, on the same day, defense contractor Lockheed Martin (LMT) will release its quarterly report. Wall Street analysts expect the company to deliver EPS of $6.73. Here, investors will tune in to see how the Ukrainian resistance effort has benefitted Lockheed.

• Stocks Upended by Rising Inflation Expectations
• Meta Platforms Not Yet in Favor Despite Low Valuations
• Stocks Give Up Early Gains on Rising Inflation Expectations
• Domino's Pizza Attracts Value Buyers