Stock Market This Week: Five Themes To Watch

Given the strong comeback effort on Wall Street in the middle of last week, investors were hopeful that a surprisingly less aggressively hawkish Federal Reserve would be the catalyst needed for a recovery effort. Alas, that hope soured quickly as the following day’s session drained the major indices in a sea of red ink. Seemingly to add insult to injury, Friday’s session also ended on a dour note.

Interestingly, not all significant developments justified the crimson print. For instance, the Employment Situation Summary -- colloquially known as the jobs report -- for April was actually quite solid, featuring 428,000 employment opportunities added. Thus, some analysts might argue that the fundamentals (at least in the U.S.) remain more or less positive.

However, the argument that the U.S. is the best house in the worst block might not be enough this time around. Primarily, global recession fears are rising due to the ongoing conflict in eastern Europe as well as the coming economic aftershocks from China’s decision to lockdown Shanghai as part of its zero-tolerance policy for COVID-19.

Though we can hope for the best, it’s also very possible that the present juncture may represent the calm before the storm. Here are five themes to monitor closely in the week ahead.

All Eyes on the Fed

As mentioned above, the Fed raised the benchmark interest rate by 50 basis points while also signaling further rate increases throughout this year. Though economists anticipated the hike itself, what caught some by surprise is that Fed chair Jerome Powell dismissed the idea of an even larger increase of 75 basis points.

Naturally, this disclosure suggested that while the central bank was keyed in on addressing inflation, it wasn’t going to take a drastic approach to achieve the goal. The news was particularly important for investors as the Fed also acknowledged that it must reduce the size of its balance sheet. However, conducting this operation while raising rates could yield unknown consequences if done to excess.

Thus, the Fed seems determined to aim for a soft landing. Unfortunately, this may be easier said than done as the inflation rate has weighed on critical metrics like consumer sentiment, which is at lows not seen since the Great Recession years. Reports for inflation and sentiment will be released this coming week.

Escalation in Ukraine

With Russia’s invasion of Ukraine dragging well into its third month, the Kremlin almost surely did not expect the amount of devastating resistance its military forces have encountered. But as May 9, a holiday known as “Victory Day” in Russia, rapidly approaches, global leaders are concerned that Russian President Vladimir Putin may officially declare war, thus escalating an already treacherous inferno.

Indeed, Reuters reported that Putin will issue a “doomsday” warning to western nations on Monday, which on paper will mark the 77th anniversary of the Soviet Union’s victory over Nazi Germany. Prepared to speak on Red Square before a parade of troops and notably intercontinental ballistic missiles, the proceedings will likely be remarkable in its show of force and intent.

Unfortunately, the U.S. and its allies cannot simply ignore the brazen messaging coming out of Russia, which has recklessly involved the threat of nuclear strikes. Recently, Adm. Charles Richard, the head of U.S. Strategic Command, warned Congress that Washington faces a heightened nuclear deterrence risk when it comes to Russia and China, per DefenseNews.

Though an actual nuclear strike may be improbable, investors still need to be vigilant as the conflict appears inevitably positioned for significant escalation.

Housing in Focus

Although the new normal may have cynically sparked fortuitous benefits such as working from home, on a net basis, arguably most households have fallen back against their financial targets. A key factor in this narrative is the housing market. Thanks to booming prices, the cost of living greatly outpaced the rise in wages and money-saving dynamics (such as no commuting to the office).

Now, with rising interest rates -- which of course raises borrowing costs -- home price acceleration has begun to ease. In some cities, such as Toledo, Ohio or Rochester, New York, the median listing price has gone negative on a year-over-year comparison. So, that’s good news for would-be homebuyers, right?

On a personal level, yes. But taken as a broader view, the stability of the housing market represents the stability of the middle class. Sadly, the rising rate of inflation and cost structures that have gone berserk against pre-pandemic norms may also spark foreclosures down the line as the decline in consumer spending forces companies into layoffs, as witnessed by Netflix (NFLX) and similar profligate firms.

Therefore, homebuyers may want to consider waiting for additional economic news before making the plunge.

Cryptos in the Abyss

One of the biggest revelations in the broader capital markets was the dramatic rise of the cryptocurrency sector. At the start of last year, the total market capitalization of all cryptos was a little over $772 billion. Eventually, it hit a peak of over $2.9 trillion in November before correcting significantly. The problem for crypto investors is that the correction apparently isn’t over.

Throughout this year, the $2 trillion market cap line represented the ebb and flow of support and resistance. However, the performance of digital assets began aligning with the U.S. equities sector in recent sessions, resulting in stomach-churning volatility. In late Saturday morning, the total crypto market cap sits at $1.65 trillion.

Needless to say, the sector must start moving higher to achieve confidence in this emotionally driven market. For years, crypto proponents have argued that decentralization is the future of finance and investing. If that’s really the case, the market must start proving that to prospective participants and observers alike.

Earnings to Watch

It’s going to be a busy week ahead with not only important economic news that will be disclosed but earnings results as well. Kicking things off on Monday will be meme-stock favorite AMC Entertainment (AMC). Whether you plan on investing in AMC or not, the company provides a real-time indicator for consumer sentiment. Box office attendance may confirm the reality of the retail revenge and revenge traveling phenomena.

On Tuesday, H&R Block (HRB) will disclose its earnings report, which is an intriguing name to watch. Understandably, the gig economy has become a powerful force throughout the new normal. Since the taxation filing is different between employees and independent contractors, observers should note whether the tax-preparation specialist saw a significant revenue increase in what would be its busiest quarter.

Finally, Six Flags Entertainment (SIX) will release its financial disclosure on Thursday. Following the devastation of COVID-19 protocols which harshly affected non-essential businesses, Six Flags will be looking to make up for lost time. As well, SIX provides a critical indicator regarding consumer sentiment.

Disclosure: The author owns AMC stock.