Cruise Line Stocks Rally On Report From Carnival

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(Tuesday Market Open) With a light news day, investors may be happy to sit still ahead of next week’s Q1 earnings season kickoff. However, travel and leisure stocks are seeing some movement ahead of the market opening. Meanwhile, shipping and transportation stocks are exhibiting some weakness. Despite a lighter day of news, the service sector does have an important report coming out this morning.

Potential Market Movers

After the open, investors should keep an eye on the ISM Non-Manufacturing PMI report to get a better read on the service sector of the economy and how inflation is affecting it. The Fed has been hoping to see consumers focus on services over goods to reduce the demand for goods and possibly help relieve inflation.

One positive sign for services came in after the close yesterday when Carnival CCL cruise lines reported that it broke its seven-day booking record. CCL was up 4.76% in pre-market trading on the news. CCL’s news is giving a boost to its competitors, with Royal Caribbean RCL and Norwegian Cruise Line NCLH trading 3.10% and 3.69% higher in pre-market trading.

A single earning announcement of note came from Acuity Brands AYI, which beat on earnings and revenue, prompting a 1% rally in pre-market trading. The manufacturing and lighting company was able to overcome a “significant increase” in material and freight costs by passing on the higher costs to consumers in the form of price hikes.

Equity index futures were a little lower before the open as the S&P 500 (SPX) is testing its February highs. Investors may be in “wait and see” mode ahead of next week’s earnings season. However, tomorrow’s FOMC Meeting Minutes could stir up a bit of a storm depending on how hawkish Fed members sound.

Perhaps, the worry is that we’re in the eye of the storm and earnings season could bring another torrent of selling if companies aren’t able pass on the rising costs of business the same way Acuity did.

Reviewing the Market Minutes

Stocks followed through on Friday’s bounce with the S&P 500 rallying 0.81% on Monday. The rally was led by consumer discretionary, technology, and energy sectors. The boost in technology stocks helped the tech-heavy Nasdaq Composite ($COMP) rally 1.9%. Stocks like Twitter TWTR and Tesla TSLA skewed the results because of their enormous market caps. The rally wasn’t particularly broad, with the New York Stock Exchange seeing advancers barely outpacing decliners.

In fact, the rally was mostly among mega-cap and growth stocks. The CRSP U.S. Mega-Cap Index rallied 0.98% while the S&P 500 Pure Growth Index rallied 1.41%. In contrast, the small-cap Russell 2000 (RUT) was only 0.21% higher while the S&P 500 Pure Value Index fell 0.55%.

Looking at Twitter and Tesla, Twitter rallied more than 27% on Monday after SEC filings revealed that Tesla CEO Elon Musk bought more than 9% of the company’s outstanding shares, making him the single largest shareholder. While Mr. Musk has not made his intentions clear on what he hopes to accomplish with his ownership, in the past he has been critical of Twitter for what he sees as suppressing free speech on its platform.

Investors appear to view Musk’s move as a defense for conservatives and Republicans that have been spurned by Twitter expulsion policies, because Digital World Acquisition DWAC fell nearly 10% on the news. DWAC is a special purpose acquisition company, or SPAC, that is looking to merge with Trump Media & Technology Group. Former President Donald Trump was using the merger to create a new social media platform after he was expelled from Twitter for disinformation over his failed reelection that may have contributed to the events of January 6, 2021.

While only related to Twitter through the presence of Elon Musk, Tesla rallied 5.61% on Monday. The purchase of Twitter shares is a personal investment by Mr. Musk and isn’t related to Tesla in any way. Instead, TSLA rallied within 6% of its all-time high as investors appeared to also focus on electric vehicle stocks. Lordstown RIDECanoo GOEVWorkhorse WKHS, and Fisker FSR all saw double-digit returns on Monday.

CHART OF THE DAY: CRAZY TRAIN. The Dow Jones Transportation Average ($DJT—candlesticks) is testing horizontal support (pink) around the 15,500 level as well as its 50-day moving average (blue) and its 200-day moving average (yellow). Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Transporter Beam: The transportation sector has been one of the strongest throughout the pandemic as many consumers turned to online retail therapy to make staying home a little more bearable. As the global economy has reopened over the last six months, supply chain bottlenecks have been a positive problem for transports. However, last week the Dow Jones Transportation Average ($DJT) fell almost 5% after the Department of Labor reported a decline of 4,900 truck driving jobs. The news appeared to suggest that demand for shipping is waning.

Additionally, freight rates are also falling according to an article by FreightWaves. The Outbound Tender Volume Index that measures the amount of freight being shipped fell 1.81% last week and was down 14.6% for the year. However, declining driver jobs and falling freight rates could simply be signs that the transports are finally catching up to the pandemic supply chain problems.

Currently, the $DJT is testing its 50-day moving average, but further weakness may be a bad sign for transports. In fact, continued weakness could also be a bad sign for the economy if demand for shipping continues to decline.  

Dimon in the Rough: Another less-than-stellar signal for the economy came from JPMorgan JPM CEO Jamie Dimon’s annual shareholder letter. Mr. Dimon warned that the U.S. economy is facing enormous risks from inflation and the war in Ukraine. While the letter was mostly upbeat, talking about the strength of the U.S. consumer, Mr. Dimon also said the Fed would likely hike the discount rate several more times this year—including by half a point in May—which would likely lead to increased market volatility.

JPMorgan will help kick off Q1 earnings season a week from Wednesday when it reports its earnings along with companies like BlackRock BLKDelta Air Lines DAL, and Bed Bath & Beyond BBBY.

Last Minute Tweaks: According to Bloomberg, analysts are making last minute adjustments to Q1 earnings forecasts and appear to have settled on a 5.7% increase in earnings growth for the S&P 500. Much of the gains are coming in the inflationary sectors like energy and materials that are benefiting from rising commodity prices. Financials are expected to be a drag on earnings despite higher yields. The 5.7% earnings forecast rises to 13.5% when financials are removed but only rises to 6.8% when energy and financials are taken out of the equation.

The revenue growth picture may be more stable at 10.2% for the S&P 500, 8% when excluding energy, and 11.4% when excluding financials. Operating margins are forecasted to be around 15.9%, which is higher than last year’s 15.4%. However, net income margins are forecasted at 12.9%, which is actually lower than last year’s 13.5%.

This means that energy and utilities could be among the biggest winners this earnings season, similar to Q4 of 2021. On the other side, consumer discretionary and communications are shaping up to be the weakest sectors.  

Notable Calendar Items

April 6: Crude Oil Inventories, FOMC Meeting Minutes

April 7: Jobless Claims, Constellation Brands STZ earnings, ConAgra CAG earnings

April 8: Wholesale inventories, WASDE

April 12: Consumer Price Index (CPI), Albertsons ACI earnings, CarMax KMX earnings

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

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