This post was originally published on this site

* Nasdaq, S&P 500 gain, Dow ~flat; small caps outperform

* Cons disc leads S&P sector gainers; healthcare weakest
group

* Dollar rising; gold red, crude ~flat; bitcoin up ~1%

* U.S. 10-Year Treasury yield ~1.58%

May 26 – Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at markets.research@thomsonreuters.com

IT’S THE DOW’S BIRTHDAY, A QUASQUICENTENNIAL! (1434 EDT/1834
GMT)

The venerable Dow Jones Industrial Average made its debut on
this day, May 26, in 1896.

The iconic Dow was launched to reflect the contribution of
industrial companies to the economy, but it wasn’t the first
index to measure the U.S. equity market.

That honor goes to the Dow Jones Railroad Average, first
published in 1884 to highlight the importance of railroads. That
index is now called the Dow Jones Transportation Average.

The DJI expanded to 20 stocks in 1920 and to its present
format of 30 companies in 1928. The Dow’s composition has
changed about 60 times since its origin.

After General Electric Co was removed in 2018, none
of the Dow Industrial’s original 12 members remain in the index.

Other members still survive, too, but with different names.
U.S. Rubber became Uniroyal and is now part of Michelin, while
American Sugar evolved into Amstar Holdings, according to S&P
Dow Jones Indices.

(Herbert Lash)

*****

SPACE SPACS? “BUYER BEWARE” (1330 EDT/1730 GMT)

Investor interest in space has “taken off” in the past year,
and space-related companies are taking advantage of Wall
Street’s “SPAC-mania,” choosing to go public via a merger with a
blank-check firm.

“Investors liquidated $7 billion of value in 15 space
company exits in Q1,” said Chad Anderson, managing partner and
founder at venture capital firm Space Capital, noting another
eight space company SPACs have been announced this year.

“In the same way that every company today is a technology
company, every company will be a space company,” Anderson told
the Global Markets Forum.

However, Anderson says “buyer beware,” when it comes to
evaluating these deals.

“Most are highly speculative from a public market
perspective … there are a few with significant revenue and
strong fundamentals to support their billion-dollar valuations,”
he said.

While the space tourism sector has grabbed attention with
Virgin Galactic completing its first manned space
flight and Blue Origin auctioning seats on its spacecraft for
$2.4 million, other aspects of the space economy interest Space
Capital.

“The sub-orbital market is inherently limited, even orbital
(launches) doesn’t make much of a business on its own,” Anderson
said. The entire market is worth around $9 billion a year.

Space Capital’s investment portfolio is focused on companies
utilizing “space tech” for more “earth-bound” purposes, such as
geospatial intelligence, GPS technology and satellite
communication and data gathering.

Meanwhile, there are plenty of opportunities to gain
exposure to space-related companies, such as the Procure Space
ETF, and the ARK Space Exploration & Innovation ETF.

While the presence of companies like Deere & Co on
ARKX’s holdings list raised some eyebrows upon its debut in
March, it fits perfectly with Space Capital’s investment thesis.

“Tractors have been utilizing space tech to drive
autonomously for decades. AgTech has been an early adopter of
satellite imagery to enable precision farming,” Anderson
explained.

(Lisa Mattackal)

*****

GET INSULATED WITH INFLATION-RESILIENT SECTORS (1227
EDT/1627 GMT)

Inflation has been a hot topic of late. With this, Ken
Johnson, investment strategy analyst at the Wells Fargo
Investment Institute (WFII), takes a look at
“inflation-resilient sectors.”

Johnson says that the rate of inflation will remain elevated
over the near-term. However, he expects it to decelerate in
2022.

Traditionally, according to Johnson, the performance of
defensive groups has been positively correlated with inflation,
while most cyclical- and growth-oriented sectors have shown
almost no correlation.

That said, Johnson cautions that although that may have been
how things played out in the past, he believes today’s
environment is different. This because he says that the
“inflation effect must be combined with the path of interest
rates and economic growth.”

Given that WFII expects strong growth to carry into 2022,
coupled with a moderate rise in rates, Johnson believes this
combination bodes well for WFII’s favorable cyclical sectors:
industrials, materials, and energy. He adds that defensive
sectors such as staples, and utilities may have a hard time in
that environment.

In terms of margins, Johnson says that some sectors are
better insulated from rising inflation. In general, he says that
sales growth for financials, real estate, consumer discretionary
and industrials tends to remain resilient as inflation rises.

Additionally, Johnson says that sectors full of firms with
high fixed costs have operating leverage that can be beneficial
when inflation and interest rates are on the rise, as firms can
boost earnings due to their cost structures. Once again, he says
industrials, energy and materials fit the bill.

(Terence Gabriel)

*****

JPMORGAN’S DIMON FLAGS INFLATION CONCERNS TO CONGRESS (1145
EDT/1545 GMT)

JPMorgan Chief Executive Jamie Dimon flagged
concerns over potential U.S. inflation during his appearance
before Congress on Wednesday and suggested the U.S. Federal
Reserve may need to raise interest rates to get ahead of rising
prices.

Dimon, who leads the country’s largest bank by assets, said
unprecedented government support for the economy and financial
markets over the past year will lead to inflation rising
“considerably higher” than the 1.6% seen in the year to March.

“Hopefully it won’t be out of whack and the Federal Reserve
would be able to tamp it down,” Dimon told lawmakers on the
Senate Banking Committee, raising the prospect of tapering by
the central bank.

His comments could stoke growing market concerns over rising
inflationary risks which had seen markets go off the boil in
recent weeks after marking multiple record highs this year.
Minutes last week from the last Federal Reserve meeting
suggested some policymakers were ready to talk about reducing
stimulus by tapering bond purchases.

(Matt Scuffham)

*****

SURPRISE! TWO LONGTIME BULLS SEE MORE UPSIDE (1120 EDT/1520
GMT)

Investors concerned the bull market may have little room to
run might want to re-examine their estimates for corporate
results, the ultimate driver of stock prices on Wall Street.

Forward profit margins, obtained by dividing forward
earnings by forward revenues per share, are at a new record high
of 12.8% for the S&P 500, according to Yardeni Research Inc.

S&P 500 operating earnings per share rose 47.4%
year-over-year during the first quarter to a record high,
suggesting the earnings growth rate in the second quarter will
be even greater, said economist Ed Yardeni in a note.

“The record high in the profit margin is even more
impressive when we consider that both labor and nonlabor costs
have been rising,” Yardeni said. “Yet instead of getting
squeezed, profit margins are soaring.”

Given the likelihood for strong real-GDP growth during the
remainder of 2021, and with first-quarter profits already above
$200 a share, Jim Paulsen at The Leuthold Group sees full-year
earnings for the S&P 500 to be at least $215 per share.

By the end of 2021, S&P 500 EPS will be 41.3% higher than
the peak profit of the last expansion reached in 2019, Paulsen
says in a note.

“There is simply no precedent for this type of profit
recovery in post-war history,” Paulsen said.

Following the 1960’s trough, profits managed to rise above
the previous cycle peak – but only by 5.2%, he said. On average,
12 months after a recession low, earnings for the last nine
recoveries were 10.3% short of the prior peak.

Stocks are facing increasing challenges from high
valuations, rising yields and rising inflation. Still, an
unprecedented recovery in profits that continues to surprise
expectations represents a powerful call option for stocks, he
said.

(Herbert Lash)

*****

THE HOUSE THAT COVID BUILT: MORTGAGE DEMAND AND THE HOUSING
MARKET (1034 EDT/1434 GMT)

A year after social distancing mandates and the new
work-from-home normal sent homebuyers stampeding to the suburbs,
thereby anointing the housing market as king of the recovery,
the crown has lost some luster.

Home loan demand fell 4.2% last week as interest rates crept
higher, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate gaining 3
basis points to 3.18% was enough to cause refi demand
, which accounted for 61.4% of the total, to fall by
7%. This more than offset the 2% rise in applications for loans
to purchase homes.

“Demand is robust throughout the country, but homebuyers
continue to be held back by the lack of homes for sale and
rapidly increasing home prices,” says Joel Kan, associate vice
president of Economic and Industry Forecasting at MBA.

Nancy Vanden Houten, lead economist at Oxford Economics,
sees the trend continuing.

“The softness will probably persist in the weeks ahead as
home sales cool in an environment of sharply higher home prices
and limited inventory,” she writes.

The dominoes are falling like this: the quest for COVID-era
living set sales on fire, with low rates acting as an
accelerant. This, in turn, sent inventories of homes on the
market to record lows, prompting a surge in homebuilding.

The homebuilding spurt soon bumped up against a shortage of
building supplies, as materials producers – who shut down
operations at the onset of the pandemic – raced to come back
online.

Lumber prices, in particular, headed to the stratosphere.

This supply drought – with respect to homes on the market
and materials to build them – has sent home prices to the moon
and beyond the grasp of many potential homebuyers.

Here’s a look at lumber prices/inventories, compared with
housing market indicators:

Many of those indicators have recently suggested the sector
is coming back to earth. Sales of newly constructed and existing
homes fell last month, Consumer Confidence shows a drop in
intentions to buy homes and groundbreaking on residential
projects is slowing down.

As for housing stocks, while they have outperformed the
broader market over the last year, their lead has narrowed in
recent weeks:

In any event, after a mixed start, Wall Street’s major
indexes are now moving slightly higher in morning trading.

Economically sensitive small caps are the clear
winners so far.

(Stephen Culp)

*****

WALL STREET TRADES SIDEWAYS IN EARLY GOING (0952 EDT/1352
GMT)

Wall Street traded sideways in the early going Wednesday, as
Amazon.com Inc’s move to buy Metro Goldwyn Mayer
(MGM), the fabled U.S. movie studio home to the James Bond
franchise, provided some upside that was offset by falling
energy and financial shares.

In what may prove to be a repeat of Tuesday’s session,
stocks are trading near breakeven, with the Nasdaq up
but the S&P 500 and Dow Industrials slightly
lower.

Despite easing concerns about a spike in inflation after
soothing talk from Federal Reserve officials, investors still
want to see a key inflation gauge to be released later in the
week.

Amazon.com is rising, making it a big early
contributor on the positive side to the S&P 500. Home Depot Inc
and Google parent Alphabet Inc are also
providing early strength.

Social media darlings GameStop Corp and AMC
Entertainment are up, extending solid gains from
Tuesday.

The initial public offering of Flywire Corp and
Dynamics Special Purpose Corp begin trading early on
Wednesday.

Markets have been choppy this week with little economic data
to trade on. Fed officials have managed to tap down inflation
angst, insisting any jump in consumer prices will be temporary,
while an easing in soft commodity prices has helped.

All eyes will be on Friday’s release of the Core PCE Price
Index, the Fed’s preferred gauge of inflation, while the second
preliminary GDP estimate for the first quarter, jobless claims
and pending homes sales are on tap for Thursday.

Federal Reserve Vice Chair Randal Quarles speaks later.

Gold topped $1,900 an ounce for the first time since
January in a sign the mood is risk-on among investors, as the
yield on 10-year U.S. Treasury notes continues to
drift lower, falling to a low of 1.557% in early trade.

Stocks face some strong headwinds with the S&P 500 up nearly
12% year to date. The benchmark index will end the year only
about 2.5% above its current level, according to a Reuters poll
of strategists. Concerns about inflation are likely to temper
some of this year’s enthusiasm for U.S. stocks.

Stocks traded near break-even for most of Tuesday, then
without a catalyst to drive prices higher, the S&P 500, Dow
Industrials and Nasdaq closed lower.

Here is where markets stand Wednesday shortly after the
open:

(Herbert Lash)

*****

SMALL CAPS: MAY NEED TO GET BACK ON THE BIKE, AND FAST!
(0900 EDT/1300 GMT)

In the wake of its biggest rolling 12-month gain ever, the
small-cap Russell 2000 topped in March after once again
flirting with a weekly log-scale channel resistance line
:

Since then, the index has turned heavy. In fact, the RUT
ended Tuesday down more than 6% from its 2,360.17 March intraday
high.

In a testament to just how stretched to the upside the RUT
had become earlier in the year, with its March 12 weekly closing
high, it finished 49.8% above its 200-week moving average (WMA).
This was its greatest level of disparity vs this long-term
moving average since October 1997, when it peaked 49.9% above
it.

Of note, from 1997 to 2018, there were six major RUT 200-WMA
disparity tops greater than 30%. In all six instances, readings
ultimately fell below parity.

Although the RUT’s tires have deflated to some extent, at
Tuesday’s close of 2,206, it remains nearly 37% above its rising
200-WMA, which is now around 1,616.

Thus, there could be substantial downside risk in the event
the index quickly descends to meet this rising long-term
average, which has recently only been gaining around 4 points a
week.

(Terence Gabriel)

*****

FOR WEDNESDAY’S LIVE MARKETS’ POSTS PRIOR TO 0900 EDT/1300
GMT – CLICK HERE:

(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)