This week I expect a test of the Friday’s rotation into technology stocks and away from anything that depends on economies remaining relatively free of Pandemic restrictions.
On Friday, the winners were technology shares–Apple, Amazon, Tesla, Nvidia, for example–that have in the past been able to show revenue and earnings growth despite any economic slowdown resulting from Covid shutdowns. And the losers were the stocks of companies–such as Six Flags, United Airlines, Macy’s, for example, that depend on the continued recovery in economic activity.
The immediate impetus for this sentiment came from news that Austria would impose Pandemic economic lockdowns–again–in an effort to slow soaring rates of infection. The believe is that Germany, the Netherlands, France, and the United Kingdom aren’t far behind. And the fear is that the United States will follow some time this winter.
Add that to worries of elevated and rising inflation–where technology companies are seen as one of the few sectors able to outgrow inflation–and you’ve got significant sentiment to push technology shares higher.
But that still might now happen–and this week will give us a decent test of the strength of this trend.
This week is a short market week with stock and bond markets closed on Thursday for Thanksgiving and the stock market closing early on Friday. But we will get the PCE (Personal Consumption Expenditures) index on Wednesday. This, the Federal Reserve’s preferred inflation measure, is expected to show a rise of 0.7% for October from September, according to economists surveyed by Bloomberg. That would be an increase from the 0.3% month gain in September and would push the PCE inflation rate to 5.1% for the last year, the most since 1990, and a jump from the 4.4% annual rate in September. The core PCE, which excludes food and energy prices, is expected to show a 4.1% year over year increase. That would again be the fastest rate of increase since 1990.
The Friday after Thanksgiving brings the annual Black Friday sales rush. This year some of the sales from that day have probably been pulled forward as stores and consumers advanced buying to head off potential supply chain problems that might leave some shelves empty for later in the retail season. But still forecasts are looking for very robust increase with retail sales in the Thanksgiving week expected to grow by 10% over last year and by 12.2% versus to the same week in 2019, according to Mastercard SpendingPulse projections. The National Retail Federation expects combined November and December retail sales will grow between 8.5% and 10.5% over last year to reach a new record of as much as $859 billion.
If retail sales come in at or above those numbers when we get initial reports on Friday and Monday that could well reverse sentiment currently running to technology and away from consumer stocks. Actual numbers below those estimates would accelerate the move toward technology stocks.
You can track the balance of sentiment between technology and consumer stocks by following the Technology Select Sector SPDR ETF (XLK) versus the Consumer Discretionary Select Sector SPDR ETF (XLY). Another alternative is to track the Dow Jones Industrial Average will its weighting toward consumer and industrial stocks versus the NASDAQ 100 index with its strong exposure to technology in general and BIG TECH in particular.