Stocks rallied yesterday on better-than-expected earnings. Value stocks outperformed growth stocks for a change as the tech-led rally took a break ahead of some important post-close earnings.
Whole wheat, please. By now you surely know that food inflation has been a big problem for… just about everyone. If you shop for food, it isn’t too difficult to spot the ridiculously high prices on just about everything. If you don’t do the shopping in your family and you read my morning notes, you are probably thinking “yeah, yeah Mark, we know, food costs more than it did a few years ago.” Sorry, but we all need food to survive. So, if you are on a fixed budget, you have no choice but to either buy less food or sacrifice something else so that you can stay healthy. If you don’t believe me, you only need to read through earnings reports from superstores like Walmart and Target and you will find a pattern of declining revenues in hard and soft lines and growing revenues in food. That pattern goes back to 2021! The following chart shows the drastic upswing in food inflation since the onset of the pandemic. I have also included a key component of food inflation Cereals and Bakery Products. You will notice that the component peaked out late last year above +16%. SIXTEEN PERCENT… that’s a lot. Ok, ok, you will also note that it has since receded, which is positive, but it is still at +8.8%, which is… um, not good. Check out the chart and keep reading.
Much of that food inflation was caused by increased commodity prices. You can’t make bread without flour, and you can’t get flour without wheat. When wheat is expensive, flour is expensive, and ultimately so is the bread… and your peanut butter and jelly sandwich. Side note: peanut butter inflation also peaked last year at almost +15% but has thankfully returned back down to +1.7%. Before you tell me that you have peanut allergies, I will remind you that butter inflation peaked out at around +31% last year. So, here is the problem. Most of those commodities are at the mercy of nature… for the most part. I have written about crop yields and weather patterns numerous times. Unfortunately, the Fed is pretty much powerless when it comes to controlling the cost of your grocery bill! Ok, so we have always been subject to wild weather swings and herd-borne illnesses (remember mad cow disease ). So why is it such a problem now?
Of course, there are many factors that go into pricing, but some more recent developments have really pushed things to the brink. Namely energy prices and the war in Ukraine. Fuel costs for industrial equipment and transportation was a major contributor to cost increases. The war impacted prices of fertilizer and wheat itself. Check out the following bonus chart and keep reading. We are almost there.
You can see just how pronounced the spike in wheat prices was. You can also see the two recent extreme spikes, the last of which has been a ~+17% jump within the last week. The jump has nothing to do with the weather but rather Russia’s recent weaponization of food. Russia has threatened to forcefully embargo Ukrainian wheat shipments through the Black Sea. Now there is intelligence that suggests that the Russian military will begin to target grain ships. This is part of a bigger strategy as Russia has already targeted ports and grain terminals recently. Can this latest development re-ignite food inflation? Let’s hope not, but once again, it is important to remember that the Fed can do very little to help out with this latest development.
STOCKS ON THE MOVE THIS MORNING
Johnson & Johnson (JNJ) shares are higher by +1.58% in the premarket after it announced that it beat on EPS and Revenues by +6.85% and +3.5% respectively. The company also raised its full-year guidance for earnings and revenues. Dividend yield: 3.0%. Potential average analyst target upside: +15%.
Netflix Inc (NFLX) shares are lower by -6.77% in the premarket after the company announced that it missed its revenue targets. This disappointed investors as many were expecting the company’s recent crackdown on password sharing to provide a revenue boost. It hasn’t… at least, not yet. Potential average analyst target upside: -5.9%. WHY IS THIS NUMBER NEGATIVE? Because the stock is currently trading higher than median average price targets of analysts. While that can be interpreted as the stock being overpriced, it does not mean that the stock will not continue to climb as analysts potentially raise price targets.
DR Horton Inc (DHI) Shares are trading higher by +5.59% in the premarket after the company announced that it beat EPS and Revenue targets by +37.98% and +16.36% respectively. The company also revealed that it beat estimated orders for the quarter and raised its full-year revenue guidance. Dividend yield: 0.78%. Potential average analyst target upside: +1.5%.
ALSO, THIS MORNING: Kenvue, Philip Morris International, and American Airlines beat on EPS and Revenues while Truist, KeyCorp, FifthThird Bancorp, Blackstone, Pool Corp, and Newmont Corp all came up short.
YESTERDAY’S MARKETS
Stocks rallied for a third straight day as earnings pushed equities higher. The S&P500 Index rose by +0.24%, the Dow Jones Industrial Average climbed by +0.31%, the Nasdaq Composite Index traded higher by +0.03%, and the Russell 2000 Index advanced by +0.45%. Bonds rose and 10-year Treasury Note yields slipped by -3 basis points to 3.74%. Cryptos advanced by +1.86% and Bitcoin gave up -0.49%. The S&P ESG Index gained +0.30%.
NEXT UP