Stock Market This Week: Five Themes to Watch

In a stock market environment starved for good news, the benchmark S&P 500 enjoyed a midweek boost on June 15 when the Federal Reserve announced a key rate hike by a magnitude of three-quarters of a point. While higher borrowing costs are fundamentally negative to business growth, investors took encouragement that the Fed was committed to controlling inflation, which has become an outrageous burden to consumers.

Caught between a rock and a hard place, the world’s most powerful central bank decided to tighten the monetary spigot. However, such an action would raise the value of the U.S. dollar relative to other currencies, stymieing competitiveness in the international export market. As well, a higher interest rate would incentivize savings-based financial vehicles compared to growth-centric investments, which is fundamentally deflationary.

Recognizing the severe challenges ahead, investors rushed for the exits, leading to a nearly 3.3% loss in the past week. When the dust finally settled, Wall Street had logged its worst one-week decline since March 2020, the month when the COVID-19 crisis temporarily capsized American society.

Essentially, the cat’s out of the bag. Recession fears are no longer the exclusive domain of doomsday bunker bloggers but a legitimate talking point – one that could have significant consequences societally and politically. With that in mind, here are five themes to watch next week.

Charging Toward Peak Inflation

Providing a countervailing argument to earlier calls that we had already passed peak inflation, pollster and political strategist Frank Luntz joined CNBC last Friday to discuss his concerns about the economy. Specifically, Luntz stated that the country is only days away from encountering a reckoning with higher prices as households prepare for Independence Day celebrations.

Essentially, inflation could worsen as we approach the Fourth of July as people stock up on groceries and pump gasoline into their cars, thereby limiting supplies. As I mentioned in an interview with CGTN America, demand for travel hasn’t died down yet, particularly as the “revenge travel” phenomenon inspires consumers to pay for experiences denied to them during the worst of the COVID-19 pandemic.

Still, Luntz appears to be suggesting that American households may reach exhaustion with escalating prices. To better determine if this conclusion rings true, investors should monitor travel demand. If consumers decide to take fewer vacations relative to historical norms, that could be a signal that household budgets are being dangerously stretched.

Telecommuting Wrinkle

Though COVID-19 imposed a net negative impact on American society, white-collar employees received a generous consolation prize: the ability to (and normalization of) work from home. But as I argued for Barchart.com in April of this year, telecommuting privileges could be coming to an end.

Among my arguments is that evidence from pre-pandemic work habits indicated that on average, American workers wasted around two hours daily when on the clock. Therefore, it’s unlikely that reduced supervision and accountability will suddenly allow employees to grow a conscience. As it turns out, more managers are increasingly growing skeptical about the virtues of telecommuting, requesting that their workers return to the office.

Naturally, many if not most are putting up a fight against management. However, an economic downturn puts a new wrinkle into the telecommuting debate. Ironically, embattled organizations may be forced to give workers exactly what they want – on a permanent basis.

On a practical level, it may be better for cubicle warriors not to stand out unnecessarily. Ultimately, there are bigger problems in the world than being gainfully employed.

China Tensions Grab Headlines

While western powers rightfully focus on Russia’s invasion of Ukraine, the issue of Taiwan’s future as an independent territory has taken another turn for the ugly. Late last week, China generated headlines when it launched its third aircraft carrier bearing the name Fujian, the province closest to Taiwan.

For years, Beijing has claimed that the breakaway island territory is an integral part of mainland China and that it reserves the right to use force to regain control. However, amid the immediate backdrop of the Ukraine crisis, both Chinese authorities and Washington have been quiet about the matter.

Still, tensions have been brewing as of late, first with U.S. officials visiting Taiwan and later, President Joe Biden’s gaffe about getting involved militarily to defend it. Since then, China has unsurprisingly ratcheted up the rhetoric, culminating with the carrier launch.

To be sure, investors need to keep a close eye on this situation. Nevertheless, it’s possible that Beijing will be restrained in its actions. Unlike the Russians, the Chinese appear to be prioritizing economic considerations rather than projections of brute strength.

Crypto Capitulation

One of the most celebrated bull markets of 2021 was the cryptocurrency sector, which started in January of last year at a market capitalization of $770 billion, eventually peaking near $3 trillion. As of the early morning hours of June 18, though, cryptos are threatening a full-circle journey.

At a market cap of $850 billion, the writing is on the wall – at least for now. Those who are buying the dips at this moment may be doing so prematurely. For anyone who has studied global markets history, periods of overexuberance rarely (if ever) find resolution immediately. Instead, time is needed to remove excess toxicities in the space before a new bull market can commence.

As well, it’s important to note that many crypto investors are young, usually members of Generation Z. This age cohort has been fortunate to enter adulthood during the recovery from the Great Recession, meaning that they’re inherently optimistic.

While there’s nothing wrong with positivity, it can also get in the way of viewing circumstances from an objective viewpoint. Therefore, it’s probably best to keep the powder keg dry during this crypto rout as many traders may buy well before the true bottom is registered.

Earnings in Focus

While earnings disclosures are quiet during this time of the year, investors should pay attention to some key reports. First up on Tuesday is homebuilding specialist Lennar (LEN). Suffering a 42% year-to-date loss in the market, Lennar may provide critical clues as to the health of residential real estate.

Another interesting disclosure will arrive in the form of Winnebago Industries (WGO). During the pandemic, Winnebago was a winner since its recreational vehicles allowed people to vacation while social distancing. But with inflation crippling much of the consumer economy, it would be interesting to see if the company can spark positive momentum.

Finally, controversial Smith & Wesson Brands (SWBI) releases its earnings report on Thursday. Because of a shocking rise of gun violence, investors will be curious to see what sentiment is like in the firearms industry. Undoubtedly, Smith & Wesson is one of the companies at the epicenter of an intense political debate.

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