Clouds gather over technology stocks

Stocks rallied yesterday led by tech shares inspired by beaten-down Meta / Facebook which announced an increase in daily users, despite missing estimates. First quarter GDP came in negative as economists were expecting a gain - stocks shrugged it off.

It’s just math, silly. It is Friday!! Deeply discounted tech and growth stocks had a great run yesterday after failing to hold onto gains the day before and getting trounced the day before that. The trounce was ignited by Twitter’s new relationship with Tesla, the failed rally came up short because China is still struggling with its COVID wave, and yesterday’s great run was inspired by all-but-forgotten Meta, whose Facebook offering still has appeal…to someone. Though it’s too early to tell for sure, today’s session looks like it will be a tough one for tech stocks as Apple and Amazon disappointed in their last night’s, post-close announcements (see SHAKIN’, below). So, clearly, earnings had a large impact on the markets in these past few sessions, which is a welcome change in this recently wacky, macro environment, the latest installment in which GDP declined in Q1…RECORD SCRATCH.  “Wait, what,” you exclaim, “how did markets rally if the Gross Domestic Product contracted?” You are scratching your head because you know that 2 consecutive quarterly GDP declines means that the US is in a recession (technically, of course). You may also know that, not including 2020’s quick pandemic recession, GDP has only declined 3 times since The Great Recession / Global Financial Crisis, twice in 2011 and once in 2014; if you didn’t, you do now and that should only make you more concerned. So why didn’t the market topple with yesterday morning’s news? Welcome to another installment of it’s just math silly.

Here is a three, or four sentence class in macroeconomics. GDP, or Gross Domestic Product, is calculated by adding together four aggregates: Consumer Spending (C), Business Investment (I), Government Consumption (G), and Net Exports (X – M), leaving us with the famous formula: GDP = C + I + G + (X – M). Consumer spending (C) is the largest, making up some 70% of total GDP and Business Investment (I) makes up around 15%. Government Spending (G) is not subject to the same forces as consumers and companies, so economists don’t typically focus on it nor do they obsess over Net Exports (X – M), because we all know that the US is a net importer of goods (AKA that dreaded trade deficit). Consumption (C) is really important because it not only makes up the largest share of GDP, but also because it is highly sensitive to economic conditions such as inflation, job growth, and sentiment. In other words, consumers are easily spooked by deteriorating macro conditions and they can single-handedly push an economy into recession. That is the lesson. Now if we look at yesterday’s ominous-looking GDP release, two things jump out at us: Personal Consumption Expenditure (C) declined by -1.4% and Exports (X) declined by -5.9%. Though the decline in consumption should not be ignored, it is likely caused by what is known as the base effect, something that I have mentioned in my previous notes. Consumption was so hot in Q4 that even a normalization would show up as a negative number. Yes, relatively speaking (compared to last quarter), we spent less, but the number itself is still quite high. Now, on to Net Exports (X-M). Imports (M) grew at a faster-than normal +17.9% in Q421 and another +17.7% in yesterday’s Q1 release. Those are larger than normal because companies are struggling to refill depleted inventories that were decimated by last year’s supply chain hang ups. Exports (X) declined in Q1 most likely as a result of the Ukraine war and Chinese lockdowns. When you do the math X-M, -5.9% – 17.9%, you end up with an unusually large -23.8% drag on the overall GDP, and when you combine it with even a small decline (caused by base effect), you end up with what may appear, on the surface, to be a harbinger of disaster. It’s just math, silly.

WHAT’S SHAKIN’

Weyerhaeuser Co (WY) is higher by +1.91% in the pre-market after it announced that it beat EPS and Revenue estimates by +8.07% and +13.24% respectively. Additionally, the company announced a dividend increase and remains “constructive” on demand for its timber. Dividend yield: 1.71%. Potential average analyst target upside: +8.1%.

Amazon.com (AMZN) shares are lower by -9.26% after announcing last night that it lost -$2.508 per share despite expectations of profiting by +$12.629 per share. Though the company beat Revenue estimates slightly, increased labor costs and fuel costs took their toll on earnings. The company lowered its forward guidance for next quarter which was lower than analyst estimates. The company cited a decrease in spending as record, pandemic-era spending is expected to continue to decline. Potential average analyst target upside: +31.3%.

Apple Inc (AAPL) shares are lower by -2.29% despite its beating EPS and Revenue estimates by +6.84% and +3.51% respectively. Shares are lower because Apple expects to lose $4 - $8 billion in this current quarter as a result from supply chain problems caused by Chinese lockdowns. Dividend yield: 0.56%. Potential average analyst target upside: +15.5%.

YESTERDAY’S MARKETS

Stocks climbed yesterday in a dip-buying bonanza, led by technology stocks after Facebook made a positive earnings announcement the night before. The S&P500 gained +2.47%, the Dow Jones Industrial Average climbed by +1.85%, the Nasdaq Composite Index jumped by +3.06%, the Russell 2000 Index climbed by +1.80%, and the S&P500 ESG Index added +2.49%. Bonds fell and 10-year Treasury Note Yields slipped by -1 basis points to 2.82%. Cryptos advanced by +2.47% and Bitcoin gained +2.0%.

NXT UP

• PCE Deflator (March) is expected to reflect year over year price gains of +6.7% compared to last month’s +6.4%.
• MNI Chicago PMI (April) may have declined to 62.0 from 62.9.
• University of Michigan Sentiment (April) is expected to come in at 65.7 in line with prior estimates.
• Next week will be filled with more earnings, JOLTS Job Openings, Factory Orders, PMIs, monthly employment numbers, and an FOMC policy meeting.  Check back on Monday for calendars and details … it is going to be a busy week.