It’s hard to keep this market down. Investors seem to want to bet on the rebound continuing and a V-shaped recovery. So despite a lot of potential headwinds, we keep pounding through.

Early signs point to more strength Wednesday as stocks continue to recover from last week’s selloff and major indices try for a fourth consecutive day of gains. Since things can’t go up forever, the question becomes, what’s next? 

If you had one of those little toy balls from the 1970s that answered questions when you shook it up, the reading now might be, “Reply hazy. Try again.”

What’s not so hazy is a slew of data hitting Wall Street today and tomorrow that could help reveal how the economy is performing during this pandemic. It all starts this morning with a look at the housing market, which has been showing signs of life lately. 

May housing starts, however, disappointed with a seasonally-adjusted reading of 974,000. That was up from a revised 934,000 in April but well below Wall Street analysts’ expectations for more than 1.1 million. We’ll have to wait and see if that hurts the homebuilder stocks today. People had been expecting a pretty decent number with mortgage rates where they are and confidence overall looking pretty good. Maybe the June data will reflect that more. 

Consider keeping an eye on the weekly crude inventories report that comes out later this morning. It rose last week by nearly 6 million barrels at a time of year when supplies are typically dropping. Another big jump might get people wondering if demand is still slow to emerge. 

Also, start getting ready for tomorrow’s weekly initial jobless claims report. These numbers have been heading steadily lower so any change in that trend might be a negative surprise for the market. Wall Street’s consensus is for 1.35 million, down from the previous 1.54 million, research firm Briefing.com said. 

There’s more testimony from Fed Chairman Jerome Powell today in front of a House committee, though it seems unlikely he’d say anything too market-moving after being in front of the lectern last week and again yesterday. Other Fed speakers are also scheduled now that the silent period around the meeting is over.

Small Victory

One key takeaway you might not hear much about is that for the second session in a row on Tuesday, small caps led the way. The Russell 2000 Index (RUT) outpaced the rest of the major indices, rising 2.3%. One element of the rally in April and May was outperformance by the RUT, and that’s potentially a positive reflection of the domestic economy because these companies tend to rely less on overseas sales.

The RUT is up 3.3% so far in June, compared with 2.2% for the S&P 500 Index (SPX). It might be a good idea to keep an eye on this relationship, because lately, when the RUT rallies, that’s been a positive for the broader market. 

Other than small caps standing out, there isn’t too much to write home about from a sector standpoint so far this week. Almost all the SPX  sectors are rising pretty much in sync, without much difference between the so-called “stay at home” firms and the “let’s play outside” companies. The market continues to respond pretty vigorously to any positive headlines about progress against COVID-19, as we saw yesterday. 

Retailers Lead Charge

Retailers could face continued volatility this year, with concerns about a possible “second wave” of the virus this fall. For most of retail, you have to decide if you’re a long-term investor or a trader. At this point, a lot of retail is still arguably a “trade,” meaning you might want to consider extra caution. 

Fed Won’t Be “Elephant” in Bond Room

Let’s go one more time around the block on the Fed’s bond-buying policy announced this week: The Fed just wants to make sure there’s plenty of liquidity in every market. In theory, this strategy should help do that. In practice, the jury is out. Other central banks have tried the same thing, and it’s not unprecedented in the U.S., either. It was tried in the post-World War II years, Powell said. But never in the “modern era,” he added.

Financials took a bit of a blow as Powell again went over the bleak economic projections and promised Fed support, all of which could keep rates at rock-bottom levels. Powell also said the central bank would adjust corporate bond buying based on market conditions. The comment may have disappointed traders who wanted the Fed to keep its foot on the pedal even as financial market conditions improve. 

The Fed chairman gave some color on the bond buying announcement, saying the Fed “doesn’t want to run through the bond market like an elephant.” 

That might stir up some interesting images, but basically he’s saying the Fed isn’t planning to do anything that would really disturb the equilibrium. Some senators said in the meeting that having the Fed in there at all threatens to do just that. One worry is that the Fed might signal winners and losers with its actions. 

During the shutdown they had an extra advantage over some other retailers because the government gave them “essential business” status and they stayed open. HD also may be enjoying the advantage of a surge in gardening interest from people working at home and having more time to get out in the backyard as the weather improves. 

Photo by Patrick Weissenberger on Unsplash

TD Ameritrade® commentary for educational purposes only. Member SIPC.