Stocks disappointed yesterday, driven lower by ongoing bank fears and some surprising earnings misses. Confidence is waning, and that is not a good sign for economic growth.
Out of sync. There used to be a time where consumer confidence was THE leading indicator on economic growth. A throwback to “our parents’ era,” when they “buckled down” when things got tough. Rough seas ahead? Steak dinners turned into sauteed mushrooms on toast. Socks with holes… were darned and not replaced. Savings were top priority. This would force butchers and sock retailers to rethink their strategies. Butchers would shift to cheaper cuts causing meat suppliers to lower wholesale prices. Apparel manufacturers had to cut costs so they could afford to lower prices to consumers. Department stores had to offer discounts to lure back absent customers. Things would eventually get back on track… all governed by the laws of microeconomics. Overly simplified, but you get the picture.
These days however things are very different. Consumers have shown themselves to be… um, indifferent to the threat of economic failure. Seemingly ever-present discord on Capitol Hill, high interest rates, high inflation, stock market volatility? No worries, perfect time to overpay for a car or a new home. Perhaps get on the queue outside one of the tony luxury goods stores at the Short Hills Mall, 5th Avenue in NYC, or Rodeo Drive. Better yet, fly to Milan… buy direct! “YOLO,”goes the saying of this generation. Charge it on the card, pay it off, don’t worry about savings, the stocks market will eventually go up once the so-called Fed Put returns. Future looks bright. Everything’s gonna’ be alright.
UNTIL IT’S NOT. No, wait, there was a pandemic just recently. That was devastating from a human perspective and economic one. Surely that would be a wakeup call, right? You don’t have to answer that questions it is rhetorical. What is comes down to is that it seems to take a lot these days to challenge the confidence of consumers. That has been a big contributor to today’s out-of-control inflation and the bane of the Fed. Car prices cannot just keep going up if consumers stop buying cars. Airline tickets cannot jump by +40% if folks decided on staycations. What would cause those things to happen? A decline in confidence.
The well-respected Consumer Confidence Indicator offered by the Conference Board has been a Wall Street mainstay indicator going back to 1967… when people still knew what it meant to darn their socks. The private-sector, non-profit thinktank has been around for over 100 years, so it knows a thing or two about consumers and the economy. The Consumer Confidence number is constructed by surveying random households every month. Respondents are asked a number of questions regarding their assessments of the current situation and their expectations 6 and 12 months hence. Things like “business conditions” or “job availability” are assessed as good, bad, or normal for current conditions. For the future conditions, are they expecting income to increase, decrease, or remain the same beyond 6 months? Will jobs be more plentiful or less plentiful in the future? Respondents are also asked if they are planning to make big purchases on things like cars, homes, and yes, whether they plan to take a vacation. All these things are wrapped up into a neat set of 3 numbers and released monthly. Yesterday, those numbers were released for April and the headline number came in significantly below expectations. To be clear, the number is still higher than it was during the pandemic, but it is certainly lower than it was for most of 2021 and 2022. The trend is heading down. For a better understanding of what caused this month’s decline, we can look at the breakdown between current confidence and confidence about the future. Paying special attention to future is probably wise… as we are, all of us, investors in the future. That number, pictured in the chart below, shows a relatively buoyant trend for the years after The Global Financial Crisis and even through the pandemic. As you will note on the chart, 2022 challenged that optimism and 2023 has yet to witness a comeback. Will that cause consumers to finally put down the wallet and allow inflation to moderate? If it does, it will certainly help to lower inflation… at the cost of economic growth. Stay confident, but maybe watch a YouTube video on sock darning… just in case.
WHAT’S SHAKIN’ THIS MORNIN’
Activision Blizzard Inc (ATVI) shares are lower by -12.31% in the premarket after it was announced that the UK would block Microsoft’s $69 billion acquisition, WHILE YOU SLEPT. The company is expected to release its Q1 earnings tomorrow. Stay tuned. Potential average analyst target upside: +6.0%.
Microsoft Corp (MSFT) shares are higher by +7.36% in the premarket after it announced that it beat EPS and Revenue estimates by +9.6% and +3.58% respectively. Investors were happy to hear of Microsoft’s plans for AI, which took top billing on the call. In the past 30 days 56% of analysts revised their targets, 32 up, 1 down, 24 unchanged, and 1 dropped coverage. Dividend yield: 0.98%. Potential average analyst target upside: +16.5%.
Alphabet (GOOG/GOOGL) shares initially rose in the wake of last night’s announcement but have since pulled back (down -1.25% in the premarket) as investors dug into the announcement which showed an EPS miss but a beat on sales. The announcement revealed that while ad sales declined, they are beginning to recover. The company also highlighted strength in its cloud services. Potential average analyst target upside: +23.0%.
ALSO, this mornin’: Vertiv, Owens Corning, Thermo Fisher Scientific, Hilton Worldwide, Otis Worldwide, Boston Scientific, WABCO, Humana, General Dynamic, and ADP all beat on EPS and Revenues while Old Dominion Freight came up short.
YESTERDAY’S MARKETS
Stocks fell yesterday on a handful of worries from bank earnings to weak economic numbers. The S&P500 traded lower by -1.58%, the Dow Jones Industrial Average declined by -1.02%, the Nasdaq Composite Index dropped by -1.98%, and the Russell 2000 Index sold off by -2.40%. Bonds gained and 10-year Treasury Note yields slipped by -9 basis points to 3.39%. Cryptos added +0.31% and Bitcoin advanced by +1.89%.
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