Stocks had a mixed close yesterday, closing above session lows as Fed minutes revealed a thoughtful approach. Mixed signals from Russia continued to roil the markets.
Life in the fast lane. You don’t have to be a rock fan to know that 1977 hit song by the Eagles. You surely heard it in movies, backing up 1980s TV hits, and possibly even more recently in the background at your grocery store as you plied through the aisles searching for healthy snacks. The song details a story of a thrill-seeking couple taking it to the edge. Lately, there seems to be a little bit of that “taking it to the edge” theme going through the markets. Let’s start at the top. The economy is running hot. Gross domestic product, more affectionately known as GDP, is higher than it was before the pandemic. Interest rates have been pegged at 0% for the better part of the last 2 years and the Government has injected trillions of stimulus dollars into consumer pocketbooks and corporate coffers. Company revenues are growing at near-record pace. Why? Because consumers are buying…and they continue to buy…whatever they can. During virus surges, consumers quickly shift from services, like restaurants and entertainment, to products. I am sure that you noticed an increase in Amazon box porch outbreaks with the recent OMICRON surge. Demand is unmistakably high! I won’t dwell on reduced supply due to supply chain issues… yeah, yeah we know. That, in and of itself can cause inflation, and it has. But there are other factors at play here. Labor is tight and companies are having to raise wages to keep seats filled. It seems odd that there are more job openings than in the past 20+ years that the Bureau of Labor Statistics has been tracking the number. Younger folks are not seeking jobs, but rather, quitting them, and older folks are simply retiring. Some are afraid to return to work while the pandemic still rages, and still others stay home to care for the children, unable to afford the skyrocketing cost of childcare. Labor, as a result, is costing companies more. Stocks have had a bumpy ride in the past few months, but the S&P is still higher by some +38% than it was at the end of 2019, and the index is only around -6% below its all-time high. Stocks are hot, considering that the market has factored in several interest rate hikes, skyrocketing inflation, and the threat of war in Eastern Europe. Earnings season has revealed that companies continue to grow revenue, earnings, and even margins. Speaking of margins, Tuesday’s Producer Price Index showed that companies are paying +29.7% more this year for unprocessed goods (raw materials) than they were a year ago. Those aforementioned rising wages resulting from the tight labor market have risen by +5.7% since last year. Barring a two-month spike in post-lockdown months April and May of 2020, the last reported annual wage growth is the highest it has been since 2006, the year the Government started tracking it, and not just by a little. The previous pre-pandemic high was +3.7% in 2008. How can companies, faced by rising raw material costs and labor costs maintain and grow their margins? They raise prices. Stock investors, as we know, do not take kindly to shrinking margins. So, inflation begets inflation and so on? Well, not really, economics teaches us that consumers will simply purchase less goods as prices go higher. In other words, demand eventually falls off causing prices to fall back to tolerable levels…in theory, at least. Yesterday’s Retail Sales figure showed a +3.8% monthly increase in January, well above the consensus estimate of +2.0%. The biggest gain (+14.5%) came in Nonstore Retailers (AKA online shopping) followed by Department Stores (+9.2%). Have you heard that car prices have gone up? Of course, you have. According to the latest CPI release, vehicle prices have risen by +23.4% over the past year. Despite rising costs, consumers continue to demand more. After partying, spending, speeding, and all sorts of other debauchery, the song ends with our protagonist asking his girlfriend to call a doctor because he thinks he is going to crash. The lyrics end with…and it was life in the fast lane, surely make you lose your mind…life in the fast lane everything all the time, life in the fast lane.
WHAT’S SHAKIN’
Cisco Systems Inc (CSCO) shares are higher by +3.5% in the pre-market after the company announced that it beat EPS and Revenue estimates by +3.61% and +0.44% respectively. The company, further, upped its 2022 EPS guidance which was above analyst estimates, resulting from strong demand. Dividend yield: 2.8%. Potential average analyst target upside: +16.5%.
Visa Inc (V) is trading higher by +1.25 in the pre-market after an announcement that it had struck an agreement with Amazon.com, ending a dispute which began last year which threatened their relationship. The company announced earnings in late January beating analysts’ estimates on EPS and Revenues. In the past 30 days 46% analysts have changed their price targets 12 up, 6 down, and 21 unchanged. Dividend yield: 0.65%. Potential average analyst target upside: +19.3%.
Albemarle Corp (ALB) shares are lower by -9.35% in the pre-market after it announced last night that it beat estimates for EPS and Revenues. The selling is likely due to softer than expected guidance, which is still strong, but underwhelming considering rising prices of Lithium, the company’s primary product. Dividend yield: 0.63%. Potential average analyst target upside: +4.2%.
ALSO, this morning: Pool Corp (POOL), EPAM Systems (EPAM), Organon (OGN), The Southern Company (SO), CommScope (COMM), Walmart (WMT), and Baxter (BAX) all beat on EPS and Revenues. Palantir (PLTR) and US Foods (USFD) missed EPS targets and Yeti (YETI) missed its Revenue estimates.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday. Initially, equities sold off in response to reports of Russian trickery but losses were paired after the FOMC meeting revealed that the Fed is not likely to surprise us next month. The S&P500 gained +0.09%, the Dow Jones Industrial Average lost -0.16%, the Nasdaq Composite Index slipped by -0.11%, the Russell 2000 advanced by +0.14%, and the S&P500 ESG Index rose by +0.15%. Bonds climbed and 10-year Treasury Note Yields lost -1 basis point to 2.03%. Cryptos added +0.86% and Bitcoin rose by +0.21%.
NXT UP