China's Lockdowns Hurting Apple, Airbnb, Starbucks, And Many More

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(Wednesday Market Open) Investors appeared to be bracing for another down day as the bond market was attracting more buyers ahead of the market open and pushing the 10-year Treasury yield (TNX) down about 20 basis points. Equity index futures are pointing to a lower open as retailers take another blow and rising lockdowns in China take a toll on the technology sector.  

Potential Market Movers

Suppliers for Apple (NASDAQ: AAPL) components are warning that they may struggle to deliver parts for Apple products due to renewed COVID-19 lockdowns in China. Apple has asked its suppliers to speed up iPhone development in reaction to the news. AAPL traded 1.21% lower premarket.

We’ve learned over the last few years that China’s lockdowns can affect other parts of the economy. Yesterday, Airbnb ABNB announced plans to close its China operations to visitors, but not for Chinese tourists traveling globally. The Wall Street Journal is reporting that Starbucks SBUXInterContinental Hotels Group IHGHilton Worldwide HLT are reporting significant declines in revenue as China’s zero-tolerance policy on COVID-19 continues.

In another blow to major retailers, Dick’s Sporting Goods DKS fell 16.68% in premarket trading despite beating on top- and bottom-line numbers. Like many other chains the past two weeks, DKS lowered its forward earnings guidance and reduced its same-store sales projections from 8% to 2% for 2022.

However, companies that cater to the higher-end consumer appear to be doing better. Nordstrom JWN was up 3.92% before the opening bell after reporting solid Q1 sales, a smaller-than-expected loss, and offering guidance at the higher end of its range. JWN cited its appeal to higher-income consumers as a reason why inflation hasn’t hurt them as much as other retailers.  

After the market close on Tuesday, luxury homebuilder Toll Brothers TOL reported better-than-expected earnings and revenues. This was positive news for a homebuilding industry hit earlier in the day by a big drop in new home sales. However, TOL is the leading builder of luxury homes which also caters to a higher-income consumer less sensitive to rising real estate prices and mortgage rates. The stock rose 3.82% in premarket trading.

Before the market open, the durable goods report was released and showed g lower-than-expected orders in April. The numbers were dragged down by a decrease in automobile orders, but in other areas of the economy,  orders appear to be relatively strong.  

Later today, the Federal Reserve will release its May Federal Open Market Committee (FOMC) meeting minutes, giving investors a chance to review what discussions took place. However, Fed members have been public about their plans for another 50-basis-point hike in the June meeting. Currently, the CME FedWatch Tool is projecting 50-basis-point hikes in June and July as well as further rate increases through the rest of the year. Investors will want to watch the bond market’s reaction to the minutes for additional insights on where the Fed might be heading. 

The Cboe Market Volatility Index (VIX) seems to be stuck to the 30 level, which suggests that tension among investors remains high and cautious—one more reason the bond market continues to attract attention.

Reviewing the Market Minutes

Lower earnings from Snap SNAP pulled social media companies lower Tuesday as the S&P 500 Interactive Media & Services Industry Index lost 5.69% during the session. A big miss by Abercrombie & Fitch (ANF) took the Dow Jones U.S. Apparel Retailers Index down 2.18% on the day.

Investors took in widening evidence of a slowing economy as a huge miss in April home sales helped drive the S&P Homebuilder Select Industry Index 2.62% lower.

All of these industry groups pushed major indexes lower with the S&P 500 (SPX) falling 0.81% and the Nasdaq Composite ($COMP) dropping 2.2.35%. The Dow Jones Industrial Average ($DJI) was able to close 0.15% on the positive side.

On the bright side, the most severe losses were trimmed by the end of the day. The Nasdaq was down as much as 3.8% during the session while the S&P 500 fell 2.5% before its bounce back. There seems to be a sentiment that the market is oversold which prompted some bargain-hunting by the close. However, investors seemed interested in bonds too because the 10-year Treasury yield (TNX) fell 10 basis points to 2.76% while the 2-year Treasury yield fell 11 basis points to 2.5%.

It was a day for yields because the utilities sector—which commonly has some of the highest dividend yields among equities—ended the day’s top-performing sector. Investors also favored defensive sectors including consumer staples, real estate, and health care.

China had a tough day in U.S. markets. Analysts from UBS Group UBS and JPMorgan JPM cut their 2022 gross domestic product (GDP) forecasts for China as new reports from Beijing suggest that Chinese government is increasing its COVID-19 lockdown efforts. The S&P China ADR Index, which follows Chinese stocks traded on U.S. markets, lost 5.58%. 

CHART OF THE DAY: WEAK SIGNAL. Over the last twelve months, the S&P 500 Interactive Media & Services Industry Index ($SP500#502030—candlesticks) has underperformed the S&P 500 (SPX—pink) but has outperformed the Communications Select Sector Index ($IXC—blue). The interactive media index hasn’t demonstrated any relative strength (green) against the S&P 500. 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

Unfriended: Snap (SNAP), parent of social media platform Snapchat fell 43.08% on Tuesday after issuing much lower earnings guidance. Saying the “macroeconomic environment has deteriorated further and faster than anticipated” Snap’s warning rattled its competitors. Meta Platforms (NASDAQ: FB), the owner of Facebook and Instagram, fell 7.62%, Pinterest PINS plunged 23.64%, and Twitter (NASDAQ: TWTR) tumbled 5.55% by the close.

This comes amid earlier announcements within the interactive media industry group to cut costs. Earlier this month, Twitter fired two senior executives and announced plans to reduce cloud computing expenditures. Meta disclosed plans to slow and even pause hiring for some mid- and senior-level positions. However, to date, major cost-cutting initiatives have not been implemented despite falling stock prices as investors demand more for their money. Many are responding by turning from growth stocks to value stocks as the S&P 500 Interactive Media & Services Industry Index is now down 37% from its all-time high.

Tough Customers? After the sector’s quarterly earnings reports began two weeks ago, the Dow Jones U.S. Retail Index has fallen about 9%. Abercrombie & Fitch’s ANF 28.58% plunge Tuesday added to the stock’s two-week retreat of nearly 45%. It all began when Walmart WMT and Target TGT reported back-to-back unexpected misses last week due to inflation costs slashing profit margins. WMT is down 18% in and TGT is down 34% over the past two weeks. Many retailers are projecting single-digit revenue and sales growth for the remainder of the year.

Many analysts continue to report that consumers are in a strong position with higher-than-normal savings to help them cope with inflation. Yet, at the same time, consumer debt is growing at record rates, according to the Federal Reserve. Overall. consumer debt has risen 14% from year ago and revolving credit, which includes credit card balances has surged by 21.4%.

So, the plight of consumers appears to be mixed. Some are concerned about the future and are looking to save money in case of recession. Others may be struggling to make ends meet. Next Tuesday’s CB consumer confidence report could be a big one for consumer goods.

Priced Out of the Market: Fewer people are in the market for what represents most consumers’ biggest purchase—a home. Sales of new homes dropped 16.6% in April, far more than the 1.7% drop analysts had forecasted. The number of new homes sold was expected to be 750,000 but came in at 591,000. April’s numbers were down 26.9% from a year ago.

New home sales are sliding as home prices and mortgage rates head upward. The median new home price was $450,600, 20% higher from a year ago. According to Mortgage News Daily, the average 30-year mortgage grew from 4.88% to 5.41% during last month. Housing inventories also rose from a six-month supply to a nine-month supply even as housing starts have fallen over the last few months.

Higher home prices, higher borrowing costs, and higher costs of living are making life hard on consumers. CNBC reported that the rise in mortgage rates for the average homebuyer added $100 to the average mortgage payment just in April alone. Since the beginning of the year, mortgage rate increases have added $450 to a monthly 30-year mortgage payment for the average homebuyer.

Notable Calendar Items

May 26: Gross domestic product, pending home sales and earnings from Medtronic MDT, Dollar General DG, Snowflake SNOW, and Workday WDAY

May 27: PCE Price Index and earnings from Dell DELL, Domo DOMO, and Hibbett Sports HIBB

May 30: Markets closed for Memorial Day

May 31: CB Consumer Confidence and earnings from Salesforce.com CRM, HP HPQ, and Victoria’s Secret VSCO

June 1: ISM Manufacturing, JOLTs Job Openings, and earnings from Hewlett Packard HPE, NetApp NTAP, and Chewy CHWY

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

Image sourced from Unsplash

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