Stocks rallied yesterday on what appeared to be positive progress on talks between Ukrainian and Russian officials. The yield curve between 2-year and 10-year Treasury Notes briefly inverted yesterday leaving analysts wondering if it was a sign of bad things to come.
What lurks below the surface. Stocks don’t always behave sensibly. In fact, they rarely do, but during some periods, the level of the market’s vagrancy is more pronounced…like right now. I keep tabs on lots of stocks which means that I am constantly collecting real time data and news while monitoring market reactions. One would expect that to be straight forward, right? A company announces that it missed earnings estimates by a mile. In an abstracted world, the stock would sell off aggressively on the news, but instead, in the real world, the stock rises by some +15% in one day! That actually happened yesterday when Dave & Buster’s Entertainment (PLAY) announced that it missed EPS targets by -14.89%. Now, the company’s margins did actually improve, but does that justify such a big daily jump in the stock? Probably not, but if you were fortunate enough to own the stock, let’s just call it a happy surprise after you were sure it was going to be a rough day. That happens a lot, in both directions.
Zooming out to a bigger picture of the markets in general, it has been a challenging couple of months as stocks ended 2021 on a high note. No one was fooling themselves as it was clear that the volatility that began earlier in September was likely to continue with the Fed on the verge of tightening monetary policy. However, most investors did not likely expect markets to fall some -12% by early March amidst an extremely strong earnings season. Confusion over what’s next? Of course! The Fed was threatening the economy with a really big gun and who knows what collateral damage might occur if the bullets miss their target. Before the Fed could take its first shot, Russia decided to invade Ukraine and the war that ensued took top spot in market moving news. Yes, there is geopolitical risk, which while very palpable, cannot really be quantified. There are, of course companies which were directly affected by not only the war but also the far-reaching economic sanctions earned by Russia. Lately, my early AM stock market research has crude oil responding to the state of the war in Ukraine. Bad news: up, good news: down. If crude is up, most energy companies register big gains in the pre-market. Other pre-market winners include industrial and materials companies which deal in commodities like steel, chemicals, and fertilizers. The big pre-market losers include any company that relies heavily on fuel (cruise lines, airlines, etc). Also found on the losers list are technology and growth stocks. The complete opposite occurs when there is positive news from the war. The market moves are not small moves either. It is not uncommon for both good and bad stocks to move many percentage points in either direction on any given day. Since hitting its 2022 low earlier this month, the S&P500 has climbed by +11%, a move which was more pronounced in the past 2 weeks. While it certainly feels good to have the market make up some of its year-to-date losses, we need to be vigilant and not lose sight of the bigger picture.
While we have been fixated on the war in Ukraine, inflation has appeared to pick up. Indeed, the war exacerbated some already present inflation drivers. Energy and fuel prices have clearly had an impact on not only industrial transportation but also on consumers’ wallets. I am sure that you have already noticed that poultry products are costing more at the grocery store, mainly a result of the tight labor market. Yesterday, egg producer Cal-Maine Foods announced earnings. In the earnings announcement the company noted margin pressures as costs continue to soar. Specifically, by +17% from the same time last year. According to the company, corn and soybeans, which are used to feed the egg-laying hens, have skyrocketed, driven not only by pressure from natural drivers (like weather) and supply chain disruptions, but also the war in Ukraine. Lots of the world’s corn supply comes from Russia and Ukraine. Who do you think is going to cover those cost rises? According to the USDA, a dozen Grade A eggs will cost you around $2.005. That is up by +36% from a year ago! By the way, Cal-Maine (CALM) missed its EPS target by -4.21%...its stock rose by +1.39% in yesterday’s session.
Getting back to the challenging stock market in general, this recent rally has been good, but we cannot afford to forget that inflation continues to be a big problem and that the Fed is getting more and more eager to tackle it every day. We will get plenty of economic data beginning today and lasting through the remainder of the week. The Fed will be watching for signs to support for its recent hawkish overtures. Tomorrow we will get another read of inflation in the PCE Deflator, which is the Fed’s favorite indicator of inflation. On Friday, we will get the most current snapshot on overall employment…the Fed’s other job. The Fed will be watching and the way in which it reacts… and really nothing else…will dictate the markets’ behavior over the next 6 to 9 months.
WHAT’S SHAKIN
Mohawk Industries Inc (MHK) is trading lower by -3.63% in the pre-market after both JP Morgan and Truist lowered their 12-month price targets and JP Morgan downgraded the stock to UNDERWEIGHT. In the past 30 days 28% of analysts have revised their targets, 0 up, 4 down, and 10 unchanged. Potential average analyst target price upside: +25.9%.
Micron Technology Inc (MU) shares are higher by +3.94% in the pre-market after it announced that it beat EPS and Revenue targets by +5.85% and +2.72% respectively. The company also provided strong forward guidance which exceeded analysts’ expectations. Dividend yield; 0.49%. Potential average analyst target price upside: +37.0%.
Apple Inc. (AAPL) has rallied by +18% with 11 consecutive positive closes. That is Apple’s longest winning streak since 2003! Shares are down by -0.4% in the pre-market, though it is too early to tell if the streak will continue or be broken in the hours to come. It is still early! Dividend yield: 0.91%. Potential average analyst target price upside: +6.9%.
YESTERDAY’S MARKETS
Stocks rallied yesterday on hopes of progress in Ukrainian – Russian peace discussions. The S&P500 rose by +1.23%, the Dow Jones Industrial Average climbed by +0.97%, the Nasdaq Composite Index advanced by +1.84%, the Russell 2000 Index jumped by +2.65%, and the S&P500 ESG Index added +1.19%. Bonds climbed and 10-year Treasury Note Yields fell by -6 basis points to 2.39%. Cryptos slipped by -0.32% and Bitcoin gave up -1.00%.
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