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Investors bid up cyclical stocks in the past week, but the economy will have to prove that the reflation trade is the way to go as concerns about Covid linger.
Markets are deep in the dog days of August, and investors are wondering whether the recovery trade favoring cyclical stocks will prevail. Some of the best performers in the past week were the materials and financial sectors, as both the Dow and S&P 500 edged to new highs.
The focus will remain on Fed policy, and the minutes of the last meeting are released Wednesday afternoon. In the past week, a parade of Fed officials, speaking at different venues, all addressed their views on what the Fed needs before it can "taper" back its bond buying, the first step away from the easy policies it put in place during the pandemic.
The consumer will be a big focus, with the government's July retail sales report Tuesday, as well as earnings from major retailers like Walmart, Home Depot, and Target during the week. The sudden drop in consumer sentiment to a 2011 level puts the focus on that monthly retail sales report, expected to show a slight decline. The consumer drives 70% of the economy, and the sentiment reading reflected concerns about Covid.
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