Progress In Europe Is Now Measured By Degrees Of Pessimism

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(Tuesday Market Open) Stocks look to bounce back as the Cboe Market Volatility Index (VIX) moved back near 33, prompted by a 110-basis-point drop in the 10-year Treasury yield (TNX). The drop in yields could be a sign that investors prefer bonds in the current environment. Stocks are getting help overseas as the Stoxx European 600 the Chinese SSE Composite Index were both up more than 1% this morning. Currently, the market appears to be flushing out overvalued stocks and less-serious investors, but once this has ended, the market might finally build a base. However, tomorrow’s Consumer Price Index (CPI) report could keep the flush-out going

Potential Market Movers

On Wednesday, investors will consider another big inflation report as April’s CPI numbers arrive before the market open. Analysts expect to see the CPI grow 8.5% year over year, reflecting the breakneck pace of inflation. If the number comes out higher than expected, the Federal Reserve may be forced to reconsider last week’s “no 75-basis-point hike” stance. In what may be a bad sign for the report, the average cost of a gallon of gas across the United States rose to a new record of $4.38.

While investors wait, there are still many companies reporting earnings, including these making news in premarket trading:

• Suncor Energy SU reported better-than-expected earnings despite lower-than-expected revenues. SU increased their dividend by 12% causing SU to rally nearly 2%.
• Food distributor Sysco SYY beat on top- and bottom-line numbers prompting a rally of 4.22% before the open.  
• Norwegian Cruise Line NCLH missed on earnings and revenue but reported record bookings that led to a premarket rally of more than 2%.
• Pandemic favorite Peloton PTON continues to struggle and lost 29.72% after missing big on earnings and revenue estimates this morning.

After the close, Occidental OXY will report earnings. It was revealed during the Berkshire Hathaway (NYSE: BRK-A) earnings, that Warren Buffett and company had increased their position in OXY.

European stocks are getting help from a better-than-expected ZEW Indicator of Economic Sentiment in Germany. The indicator was still low at -34.3 but came in higher than the forecasted number of -42 and higher than previous month at -41. But right now, less pessimism is progress. However, the report showed the current conditions index fell to -36.5, the lowest number in a year and below expectations. Europe is also facing the global economic obstacles related to ongoing COVID-19 restrictions in China.  Meanwhile, the European Central Bank is expected to raise short-term rates in the next six months as inflation continues to rise.

Reviewing the Market Minutes

The Nasdaq Composite ($COMP) dragged other indexes lower to start the week’s trading, falling another 4.29% and extending its bear market to a drop of 27% from its all-time high. The technology and consumer discretionary sectors powered the Nasdaq’s losses.

The Technology Select Sector Index fell 3.87% while the Consumer Discretionary Select Sector Index dropped 4.3% as mega-caps lost ground. By the close, Tesla TSLA fell 9%, Amazon (NASDAQ: AMZN) lost 5.12%, and Apple (NASDAQ: AAPL) slid 3.08%.

However, the energy sector was the worst-performing group in response to a 6% drop in crude oil futures and an 12% plunge in natural gas futures. The Energy Select Sector Index fell 8.27% on the day. Natural gas has fallen about 19% in the last two days but only after rallying 145% from the first of the year through May 5. The current slide appears to be in response to Saudi Arabia cutting oil prices for Asian buyers due to weak demand related to China’s COVID-19 lockdowns.

Despite the 10-year Treasury yield (TNX) moving higher in Monday’s premarket trading, the benchmark yield fell 44 basis points by the close as investors abandoned stocks in favor of bonds. Investors were also buying up consumer staples companies like Walmart WMT, Campbell’s Soup CPB, Sprouts Farmers Market SFM, Kroger KR, Kellogg K among others.  The Consumer Staples Select Sector Index was the only positive sector throughout the day, but finally turned negative just before the close.

The S&P 500 (SPX) finished the day 3.2% lower with the benchmark index closing slightly below 4,000. The Dow Jones Industrial Average ($DJI) fell 1.99%. However, the Russell 2000 (RUT) almost kept pace with the Nasdaq, falling 4.21% and punctuating the point that investors just aren’t willing to hold riskier assets right now.  

CHART OF THE DAY: BREAK DANCING. The Nasdaq Composite ($COMP—candlesticks) broke support around the 12,000 level on Monday. The next potential level of support could be just below 11,000. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Quiet Bubble: Electric vehicles (EV) are known for their quiet, almost UFO-like sound, but their stock prices have made a lot more noise. Today, investors clearly didn’t like what they heard. Could it be possible that the EV’s bubble has quietly burst? To begin, Monday’s sell-off in Tesla (NASDAQ: TSLA) took the stock down 35% from its November all-time high.

And before the open, Ford F announced plans to sell 8 million of its roughly 100 million shares in EV truck maker Rivian RIVN now that the company is past its IPO lockout period. According to CNBC, another investor plans to sell too. Such sales don’t mean that Ford or other investors no longer believe in the company. In fact, Ford and Amazon (NASDAQ: AMZN), another big Rivian investor, appear to be hanging on to the majority of what they own. However, RIVN fell 20.88% on the day and is down 87% from its November high.  

However, other EV makers are now trading well off their all-time highs: Nio NIO is down 79%, Lucid LCID has lost 73%, Fisker FSK is trading down 67% and Li Auto LI is down 56%.

Pop Art: Just because bubbles burst, it doesn’t mean the product is a failure—it could simply mean that investors were getting a little ahead of themselves. In his book Irrational Exuberance, Dr. Robert J. Shiller outlines structural, cultural, and psychological factors to a bubble. Easy money and a favorable regulatory environment are two structural factors that spark market bubbles. In the past two years, with extra liquidity from the Fed and Congress, investors found themselves with excess funds that likely contributed to overinflated EV stock prices.

Likewise, the Fed cut rates throughout the 80s and 90s which eventually helped drive to the dot-com bubble of the late 90s.  And in 1978, Congress passed a law which created 401k retirement plans, creating a new class of investor participating directly in the markets by the end of the 80s.

While that bubble eventually popped, many of the stocks that were part of that era like Cisco CSCO, Microsoft MSFT, Amazon (NASDAQ: AMZN), eBay EBAY are still around. Many other were acquired or merged with other companies. Whether all of some of the current EV makers are still around in a decade, no one knows. But it’s likely that some of them will still find some long-term success.  

Grounded: Despite reporting good earnings and record bookings, the travel and leisure group continues to struggle and was one of the hardest hit industry groups in yesterday’s sell-off. The Dow Jones U.S. Travel & Leisure Index fell 5.96% and is trading below its March lows. However, it’s not just in the United States. According to Reuters, travel and leisure stocks led European shares to a two-month low on Monday.

Investors appear to be concerned that would-be travelers are going to cancel their trips as their budgets feel the pinch. However, the news is still all about the high number of bookings and nothing about cancellations. The International Air Transport Association (IATA) is seeing much stronger demand than expected. And while travelers are avoiding Russia due to the war and China due to lockdowns, the IATA is forecasting an 83% increase in 2022.

This morning travel and leisure stocks are among the biggest gainers in European.

Notable Calendar Items

May 11: Consumer Price Index (CPI) and earnings from Toyota TM, and Walt Disney DIS

May 12: Producer Price Index (PPI) and earnings from Brookfield BAM

May 13: Michigan Consumer Sentiment and earnings from Honda HMC

May 16: Earnings from Take-Two TTWO and James Hardie Industries JHX

May 17: Retail Sales and earnings from Walmart WMT and Home Depot HD
TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

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