When it comes to reopening, there aren’t many better barometers than Disney DIS. From theme parks to movie theaters to resorts, the company has a finger in lots of pies.
That may be why last night’s strong quarterly performance from DIS appears to be giving Wall Street a lift this morning. After lagging the market all year, DIS shares had a nice pop after the close yesterday, climbing 5%. Disney+ added more subscribers than analysts had expected and theme park attendance rebounded.
One big question was whether the Delta variant and the big outbreak in Florida might hurt business at the Magic Kingdom. The answer, for now, appears to be more beauty than beast, as DIS executives said they’re “bullish” about the parks’ recoveries and continue to see “really strong demand.”
At the same time DIS impressed and saw shares rise, we saw the dichotomy of this market in earnings from Airbnb ABNB. Shares are down 3% after the company sounded unsure if people would travel this fall due to Delta.
In a way, this is a good example of how there’s a dichotomy around the market not only about reopening, but about a lot of other things, too. Is Delta going to be a long-term or a passing issue? Is inflation peaking or gaining? Is the Fed getting hawkish or staying dovish? There’s a lot of questions around, but answers are unclear. If you’re having trouble figuring it out, well, so is everyone else. As an investor, it may be a good idea to keep trade sizes small and stick with quality companies until some of this gets sorted out.
Cyclicals Pull Ahead, But Rally Now A Memory For Chip Stocks
As we approach the end of the week, it’s interesting to see which sectors led the way and which ones dragged behind the pack. Financials have outperformed everyone the last few sessions, maybe getting some help from ideas that the Fed could get more hawkish. The 10-year Treasury yield peaked at 1.37% on Thursday, a pretty amazing leap from last week’s low of 1.12% and the highest it’s been in almost a month. Banks tend to benefit from rising yields, which can help their margins.
Materials also have enjoyed a good week, as steel and mining companies saw shares rise following the Senate passing its infrastructure bill. The key is to not get too excited yet about the possible impact because there’s still a long way to go before we see any shovels in the ground. One major hump is getting it through the House.
Energy got a little love despite crude falling below $66 a barrel at the start of the week. Crude bounced back pretty nicely to near $69, which is still below the 2021 peak but may point toward decent demand even amid the Delta variant. Crude could be a key barometer of the economy in the coming weeks as the summer driving season goes into its final act.
Health Care and Real Estate lagged recently, perhaps a sign of a more “risk-on” attitude developing as the market keeps hitting new highs. Rising yields also could be hurting sectors known for their dividends.
Tech is also near the back of the pack, but that could reflect some profit-taking as many mega-cap stocks recently hit new highs. Another reason Tech’s under pressure has to do with the semiconductors, which you might remember was on fire not too long ago. Yesterday, Micron MU and Western DIgital WDC fell sharply after Morgan Stanley MS put out a report titled, “Winter Is Coming” for the memory chip sector. The report was picked up by Barron’s, and that appeared to be kryptonite for the Philadelphia Semiconductor Index (SOX), which fell 1.2% Thursday even as most of the market rose.
According to MS, as explained by Barron’s, the chip industry is entering the late portion of its cycle, where memory supply outstrips demand. That has historically led to less compelling returns from chip companies. In the research note, MS said that the heavy demand that contributed to the global chip shortage has begun to pull back, and that price hikes enjoyed by memory suppliers would likely begin to reverse next year.
As with any analyst report, it’s important to take this for what it is: One firm’s opinion. The memory portion of the chip market is volatile and goes quickly in and out of cycles. MS believes there’s a transition in the cycle, but that remains to be seen.
More Thoughts On Higher Prices
Yesterday’s surprisingly hot Producer Price Index (PPI) report probably increased the uncertainty around what the Fed might do next. For a lot of Thursday’s session, it felt like the market didn’t know how to react. Major indices traded “both sides of unchanged,” as they used to say in the Chicago pits. Yields went up and down but never ventured far from the flat line. Crude stayed pretty much where it was, and volatility actually dropped.
The Fed is nothing if not deliberative. It’s not going to let one number force its thinking. On the other hand, you could argue this is more than one number. PPI has sizzled since March, never growing less than 0.6% in any month between March and July.
As research firm Briefing.com noted, “The key takeaway from the report is that producers are clearly paying higher prices, which could translate into profit margin pressure if they are not successful in passing through price increases to customers that offset their higher costs.”
If prices get passed along to consumers, we might see the consumer price index (CPI) tick up more sharply in August than the 0.5% it grew in July. Consumers haven’t seemed to balk yet at paying up for things, but next week’s retail earnings calls and retail sales report could provide a bit more insight into how that’s playing out. Also, keep an eye on the Michigan sentiment report this morning, which often gives some perspective on consumer thinking.
Consumer spending makes up 70% of the economy, and it helped gross domestic product (GDP) grow at a very solid pace above 6% in the first half of 2021. Those who say the economy has peaked or is close to peaking might get more people on their side if CPI keeps rising and starts to take the edge off of consumer spending.
You also have the Delta variant causing problems, which we saw this week when Southwest (LUV) announced it’s seeing more cancellations, and Pfizer PFE and Moderna MRNA shares on the rise overnight as the government authorized third vaccine doses for some people. With the Fed’s Jackson Hole conference straight ahead and then their meeting in mid-September, the next few weeks could get very interesting.
CHART OF THE DAY: RUT’S RANGE. The Russell 2000’s (RUT—candlestick) five-month trading range (yellow horizontal lines) may suggest that the index has plenty of volatility yet no clear sense of direction. RUT has been trading between 2360, the top of the range, and 2085, the bottom of the range. Without compelling fundamental data, cyclical ranges can extend for a period of time (in this case five months). Data source: FTSE Russell. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Worried About Rates? Watch Debt: Yesterday’s hot producer price index (PPI) report helped renew fears that the Fed could turn hawkish a bit sooner than some might have expected. Assuming that’s the case and interest rates start climbing again (the 10-year yield reached a nearly one-month high near 1.37% Thursday), investors could start considering ways to position themselves. When rates rise, borrowing costs go up. That means highly-leveraged companies—with a lot of debt—or companies that plan to use debt to fund new growth could become a bit more dangerous as investments. That’s because higher rates lead to higher borrowing costs. Remember, too, that highly leveraged companies need to pay their creditors before they can pay their investors. Something to consider if you’re in for the longer term. At the same time, companies with strong cash flow-to-debt ratios might suddenly warm investors’ hearts.
Already, this dynamic could be showing up in some sectors as the market considers possible tighter policy by the Fed. Energy, a sector traditionally associated with debt, is the worst S&P 500 performer of the last month. Consumer Staples might be another sector that investors watch warily for the impact of tighter policy. There’s been a lot of consolidation there recently, which is often associated with higher debt levels.
An Apple For Teacher: While schools across the country continue to wrestle with Covid protocols, the good news for the market is that most districts appear to be reopening in person. Those Zoom ZM classes might occur here or there, but the last two school years of at-home learning hopefully will soon be just a memory for most of us and our kids. What does that have to do with the market? Well, consider this week’s report on job openings that showed more than 10 million positions available.
That’s a massive number never seen in the history of these reports. The back-to-school season could coincide with a bunch of those jobs getting filled. We all know child-care has been a burden for parents who aren’t able to go into the office, so maybe once the kids have a place to go each day, people might be more flexible to take an open position. Also, as kids go back to school and families come back from vacation, maybe the market will get a better sense of direction. We’ll have to wait and see.
Retail Earnings Up Next: Though earnings season is about 90% over, there’s a few more left on the rack, so to speak, as we head into the new week. This is the point in every earnings season when the retail sector gets its spot in the sun, and it may be fitting that we also get the monthly retail sales data from the government next week. Walmart WMT, Macy’s M, Target TGT, Kohl’s KSS, and Lowe’s LOW are all on the plate in the coming days, and it may be a good time to check in on how or whether the Delta variant is affecting shoppers. One thing from this week that stood out was how a dating site had strong earnings while an internet auction site gave a soft outlook.
This implies that people are wanting to get back out despite Delta, and may have implications for stores that are more digitally focused. If you’re a TGT or a WMT, you’re equipped to handle brick and mortar as well as digital shoppers. Other retailers are a bit more specialized. If people are continuing to shop outside their homes (and anecdotally, the crowds on Chicago’s Michigan Avenue have been thick lately), that could be good news for a Macy’s type of retailer that’s always banked on atmosphere and personal service.
Another store that might benefit from more people leaving home could be La-Z-Boy LZB, which reports next week. A lot of people have discovered online furniture shopping during Covid, but many of us do prefer to sit on a few couches before buying one.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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