Stock Market This Week: Five Themes to Watch

After a brutal series of sessions where the U.S. benchmark indices absorbed myriad negative news, Wall Street delivered a much-needed win last week. When the closing bell on the afternoon of June 24 rang out, investors saw flashes of green. The Dow Jones gained 2.7%, the S&P 500 was up slightly over 3% and the technology-centric Nasdaq churned out a 3.3% increase. Is this a sign of a reversal?

In the near term, it’s quite possible that investors at large could bid up the equities sector. With few viable options, market participants are looking for any reasonable place to park their money. For instance, gold – which should respond positively to inflationary conditions – has reacted disappointingly as of late. Therefore, the surge in the stock market provides a critical confidence booster.

Nevertheless, Wolfe Research analyst Chris Senyek warned investors not to get too overconfidence. In a research note, Senyek stated, “While there may be some additional near-term follow through, we believe that our intermediate-term bearish base case remains intact and that the next leg down is going to be driven by rising recession risks and downward earnings revisions.”

Adding to the cautionary angle, several factors may impart unpredictable currents in the equities space. Below are five key themes to consider for the upcoming week.

Soaring Energy Bills

If you felt that the weather was unusually warm for this time of year, you’re not alone. From publications such as NPR to The Washington Post, near-record temperatures have garnered headlines across the nation. What’s more, the abnormal heat wave has gone international, with firefighters in Spain and Germany wrestling wildfires earlier this month.

At home, the blistering heat has resulted in higher energy consumption – and this in turn has spiked demand for natural gas. According to the U.S. Energy Information Administration, natural gas represented the largest source (about 38%) of U.S. electricity generation in 2021. Typically, under these circumstances, utility firms will look to coal to help ease the burden.

The problem? Coal itself has increased in price, making it a less economical choice for electricity generation. It’s possible, then, that forward-thinking investors will start to consider adding natural gas stocks to their portfolios, such as Cheniere Energy (LNG) or Kinder Morgan (KMI).

Lithuania Flexing Its Muscle

As if Russia’s dangerous invasion of Ukraine wasn’t enough of a geopolitical nightmare, the European crisis may be poised to rear its ugly head yet again. This time, Lithuania – a Baltic nation and a NATO member – is in the spotlight, albeit for less-than-desirable reasons. In accordance with U.S.-backed sanctions against the Kremlin, Lithuanian authorities have blocked railway transport from Russia to its Baltic enclave Kaliningrad.

Furious, Nikolai P. Patrushev, the head of the Kremlin’s Security Council, stated that “Russia will certainly respond to such hostile action.” As well, he declared that Moscow will take measures “in the near future” and that they “will have a serious negative impact on the population of Lithuania.”

Though the Russians technically have the ability to ship goods through the Baltic Sea from their port in Saint Petersburg, the waterway tends to freeze during the winter. Therefore, Kaliningrad is largely dependent on the railway, posing another escalating conflict in Europe.

Cryptos Struggling for Traction

Equity investors weren’t the only ones smiling this week. The cryptocurrency sector has finally started to generate positive momentum, with several individual coins and tokens printing double-digit gains over the past week. Still, it has been a rough year so far for cryptos and thus, the lack of broader traction in the sphere poses significant concerns.

At the start of 2022, the total market capitalization for all virtual currencies stood at $2.2 trillion. After a sizable dip in May, the market cap figure was trending around the $1.2 trillion level. However, the latest downturn earlier this month brought the tally below $1 trillion. As of Saturday afternoon, the valuation was approximately $946 billion.

Here’s the issue. Because so many institutional players jumped on the crypto bandwagon, 2021 was a banner year for digital assets. However, one of the key narratives – that cryptos represent a hedge against inflation – has not panned out. Institutions are not in the business of losing money so the risk of further volatility is not out of the question.

Travel Sector Nightmares

On Friday, the news cycle reported that pilots for United Airlines (UAL) will receive raises of more than 14%, along with eight weeks of maternity leave based on a tentative deal between the pilots’ union and the airliner. Obviously, it’s welcome news for those responsible for flying passengers to their destinations. Still, it raises questions about the air travel sector.

For one thing, pilots for other carriers such as Delta Air Lines (DAL), American Airlines (AAL) and Southwest Airlines (LUV) are also in talks with their respective employers. They will be looking for similar compensation structures to say the least. With the airline industry facing a massive pilot shortage, carriers will have little choice but to pay up.

However, it raises the question about where this money will come from. We must remember that airliners suffered a catastrophic loss of business from which they have yet to recover. While making passengers pay seems like the best option, a stretched consumer economy will almost surely cause fissures.

Earnings in Focus

Although this part of the calendar is quiet for earnings disclosures, there are still a handful of companies offering insights into the economy. First up on Monday is Nike (NKE). A discretionary retail giant, Nike products are always popular, though demand may be challenged because of inflationary pressures. Look for signs on how management intends to navigate these troubled waters.

Later in the week on Thursday, semiconductor firm Micron Technology (MU) will disclose its financial performance. Of course, Micron has been heavily damaged because of the global supply chain disruption that has acutely affected computer chips. Therefore, investors should carefully parse through management’s updates regarding supply chain dynamics.

Finally, we have Constellation Brands (STZ), which also releases its quarterly results on Thursday. A premium producer of beer, wine and spirits, rising demand might be associated with increased stress in the populace, making it a sociologically intriguing company to put on your watch list.

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