Disney And Six Flags Send Investors On An Earnings Roller Coaster

(Thursday Market Open) Investors look to build on the momentum from yesterday’s softer-than-expected Consumer Price Index (CPI) that prompted a broad rally in the stock market. 

Potential Market Movers

The Producer Price Index (PPI) was also softer than expected in July with wholesale inflation actually falling 0.5% for the month — coming in at 5.8% year over year (YOY). Core PPI increased 0.2% for July,  lower than the forecasted 0.4%. Core PPI was on target YOY at 7.6%. Lower wholesale inflation should translate into lower input costs for companies, which could mean wider profit margins.

Equity index futures were higher before the report came in and eventually moved higher after some initial volatility. The Cboe Market Volatility Index (VIX) remained relatively unchanged after the report, staying below the 20 level.

Some other positive inflation news came from AAA, which reported that the average gas price in the U.S. fell below $4 per gallon at $3.99. This is the lowest average since March. Falling gas prices offset increases in food and shelter costs in July, which caused yesterday’s CPI to come in lower than expected.

Initial jobless claims rose 262,000 last week, which was lower than the forecasted 263,000. The numbers reflect a job market that remains tight.  

Second quarter earnings reports continue to flow in. After leading the other components of the Dow Jones Industrial Average ($DJI) on Wednesday with a rally of 3.98%, Walt Disney DIS reported better-than-expected earnings after the market close, prompting the stock to rally another 6.8% in after-hours trading. The company found a big boost in its theme park business, and it added more-than-expected subscribers to its Disney+ streaming platform. In fact, Disney+ now boasts more subscribers than Netflix NFLX. However, the company did lower its subscriber forecasts, and some analysts expressed concern over the costs to acquire subscribers.  

Despite Disney’s theme park success, Six Flags SIX reported misses on earnings and revenues, causing the stock to plunge 15.23%. The theme park operator saw fewer than expected people visiting the park this summer as the company said it plans to increase prices to make up for “decades of heavy price discounting.”  

Brookfield Asset Management BAM missed on earnings estimates despite topping revenue estimates, but the stock still rose 1.94% ahead of the opening bell. BAM reported a record number of inflows at $56 billion. Brookfield Chief Financial Officer Nick Goodman said the firm is still on track to deliver 25% interest to its shareholders.

Cardinal Health CAH also missed on the bottom-line number despite beating on the top line, but the stock sold off 3.17% in the early morning session. Cardinal’s CEO Mike Kaufman is also stepping down in September; CFO Jason Hollar will replace him.

High-end furniture maker Arhaus ARHS skyrocketed 33.91% in the premarket after beating estimates. The company also increased its full year outlook for 2022.

After the market close, electric truck maker Rivian RIVN is slated to report earnings. Rivian’s stock has plunged nearly 80% from its peak back in November, which was reached about a week after it went public. The stock has been the cause of large investment losses for companies like Amazon AMZN and Ford F

Reviewing the Market Minutes

Stocks rallied on Wednesday due to softer-than-expected Consumer Price Index (CPI) data. Analysts estimated the CPI would grow 0.2% in July, but the print was 0.0% because falling fuel prices offset gains in food and shelter prices. However, the CPI still grew at 8.5% year over year (YOY), but even that number was below the estimated 8.7%. Core CPI, which excludes energy and food prices, rose 0.3%, which was below the forecast of 0.5%. Finally, Core CPI grew at 5.9% YOY, which was better than the forecasted 6.1%.

The inflation news had investors thinking the Federal Reserve may be able to slow its rate hikes starting in September. The CME FedWatch Tool is calculating a 58.5% probability of a 50-basis-point rate hike in September. After last week’s jobs report, the tool favored a 75-point hike. However, the Fed doesn’t meet again until September 21, which means there’s another CPI report to come before the meeting.

The bond market had a volatile reaction to the news with the 2-year Treasury yield falling from 3.27% before the report to a low of 3.08% and finally closed at 3.19%. The 10-year Treasury yield (TNX) started at 2.8%, fell to 2.69%, and closed near its pre-announcement yield of 2.79%.  

Falling yields took the U.S. Dollar Index ($DXY) down more than 1.5%, but as yields bounced back, so did the dollar, although it wasn’t to the same degree. The dollar index closed 1.07% lower.

The weaker dollar helped multinational mega-cap stocks that have seen their earnings reduced by currency exchanges. The CRSP U.S. Mega-cap Index jumped 2.18% and closed above its May highs. Additionally, growth stocks were also helped by the idea that the Fed could slow rate hikes as the S&P 500 Pure Growth Index rocketed 3.54%.

All sectors closed higher on the day, but materials—a sector known for benefiting from higher inflation—was the top performer. The Materials Select Sector Index rallied 2.88%. Energy was the second-worst performer. The price action appears to reflect the difference between headline inflation and core inflation because headline inflation is more directly influenced by energy prices. 

When all was said and done, the Nasdaq ($COMP) was the top index, rallying 1.63%. The S&P 500® index (SPX) rose 2.13% and closed above its May highs. The Dow Jones Industrials ($DJI) climbed 1.63% and closed near its May highs. NYSE advancers outnumbered decliners at a pace of nearly 7-to-1.

CHART OF THE DAY: TAKING INVENTORY. The S&P/Case-Shiller U.S. National Home Price Index FRED rose throughout the ’90s and early ’00s as the Monthly Supply of New Houses in the United States FRED declined. Home prices peaked as the supply of homes grew. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. 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

BUYER’S MARKET: The housing market has struggled with low inventories through much of the pandemic, which helped push the S&P/Case-Shiller U.S. National Home Price Index up 42%. However, Realtor.com is reporting that housing inventories grew 30.7% in July, which was the fastest pace on record. This is also the third month in a row of inventory gains. The biggest gains occurred in the West with inventory rising 68.9%.

New listings were down 2.8% in July YOY as prospective sellers appear hesitant to put their homes on the market. This could be a good sign that the recent surge in inventories is a return to normalcy. A rush to sell homes could cause the housing market to fall.

HOUSING BUBBLE? Yale professor of economics Robert Shiller—the Shiller part of the Case-Shiller index referenced above—told Yahoo Finance on Sunday that the U.S. housing market could be in trouble. Prof. Shiller released his book Irrational Exuberance that documented problems with the dot.com bubble just before the burst in 2000. His second edition, in which he talked about the housing bubble, came out just before the 2008 housing market crash. Mr. Shiller said that he’s seeing a lot of the same signs today that he saw before the last housing crash.

Recently, CME housing futures have been in a condition known as “backwardation”, which suggests the futures market is expecting a 10% decline in home prices by 2024 or 2025.

SHELTER COSTS: Falling gas prices offset rising shelter costs in the July CPI report. Shelter costs rose 0.5% in July and was up 5.7% YOY. The CPI’s shelter index tracks changes in rent and utilities if included in a lease, plus any government subsidies as well as the costs related to the value of owning a home but not the changes in home values.

In the last year, shelter costs haven’t risen as much as other items like food (10.9%) and gasoline (44%), but shelter tend to be a bigger portion of a household budget. So, rising shelter costs could continue to squeeze budgets even if energy and food prices fall.

Notable Calendar Items

Aug 12: Michigan Consumer Sentiment

Aug 15: Earnings from James Hardie Industries (JHX) and ZipRecruiter (ZIP)

Aug 16: Building permits, Housing Starts, and earnings from Walmart (WMT), Home Depot (HD), and TJX Companies (TJX)

Aug 17: Retail sales and earnings from Cisco (CSCO), Lowe’s (LOW), Analog Devices (ADI), Target (TGT), and Macy’s (M)

Aug 18: Philadelphia Fed Manufacturing Index, Existing Home Sales, and earnings from Estee Lauder (EL), Applied Materials (AMAT), NetEase (NTES), and Ross Stores (ROST)

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

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