Before The Bell
It will not be the typical Thursday morning for Wall Street this week. The U.S. stock market usually takes its cue from the economic releases, but none are scheduled today, as the government agencies are closed in observance of Veterans Day. That said, investors will still have plenty of economic data to digest following the release of some important reports on prices the last two days, both of which showed a spike in inflation during the month of October. Yesterday’s Consumer Price Index reading, which detailed the biggest 12-month increase in three decades, pushed the yields on short-term Treasury bonds notably higher and that pressured the high-growth stocks yesterday. This morning, the equity futures are suggesting some rotation back into the sectors that took a hit yesterday. (The U.S. bond market is closed for Veterans Day.)
The Federal Reserve’s continued stance that inflation will prove transitory has taken hits over the last few months. On the heels of a report that showed a sharp uptick in producer (wholesale) prices, the Labor Department’s companion report on consumer prices fanned the flames of inflation concerns. Specifically, October consumer prices rose by a greater-than-expected 0.9%, which exceeded the consensus expectation of 0.6%. The figure excluding the volatile energy and food components also came in hotter than expected and, as noted above, the year-to-year increase of 6.2% marked the biggest 12-month surge since 1990. The hot inflation data, combined with a disappointing Treasury bond auction yesterday afternoon (the yields, which move inversely to prices, on bonds sold were higher than anticipated) and growing sentiment that the central bank may be forced to act sooner than expected on the monetary tightening front, put notable upward pressure on bond yields. The upward movement in fixed-income yields has not been a good backdrop for the high-growth sectors in 2021, and that trend played out yesterday.
Not surprisingly, given the latest inflation numbers, the technology-heavy NASDAQ Composite (down 264 points or 1.7%) was punished the most during yesterday’s session. It also was a difficult day for those investors holding small-cap equities (the Russell 2000 fell 1.6%), which is another sector that doesn’t typically fare well when concerns about inflation and rising rates are on investors’ radars. Higher prices for materials and rising borrowing costs make it more difficult for small businesses to operate. It is harder for the smaller entities than their larger peers to push higher operating costs onto the consumer. This may provide a big advantage for the mass merchandisers, like Amazon.com (AMZN), Walmart (WMT) and Target (TGT), among others, during the holiday shopping season. These companies may also be best equipped to deal with the supply-chain disruptions and handle the anticipated shipping delays.
In general, the hot inflation data and jump in yields (the coupon on the 10-year Treasury bond rose 11 basis points yesterday) prompted some notable sector rotation. The inflation-trade and cyclical groups garnered some interest among investors. There also was a “flight to safety” on display, with the utilities, healthcare, and consumer staples sectors finishing the day in positive territory. Given the growing sentiment on Wall Street that near-term prices will continue to remain elevated, due to supply chain disruptions and labor shortages, we would give the value-oriented cyclical sectors (i.e., financial, energy, and materials) a close look. The materials stocks also are getting a nice boost from the passage of the big infrastructure spending bill on Capitol Hill this week.
The third-quarter earnings season, overall a good one for Corporate America, has been a bit different than prior cycles, though. The price movements in the stocks of many companies following the release of quarterly results and guidance have been much more pronounced than normal. Perhaps the fact that market valuations were quite lofty entering the period has something to do with the movement, but we also think that with the inflation concerns front and center, investors are rewarding those showing an ability to weather the supply-chain disruptions and resultant higher prices, while penalizing those that delivered weaker-than-expected results and/or are warning of near-term operating woes due to the aforementioned variables. On point…
The latest batch of earnings news reflected these issues. Shares of Beyond Meat (BYND) tumbled in afterhours trading after the plant-based foods producer reported a sharp drop in sales, as the COVID-19 Delta variant diminished restaurant demand, particularly at the independent restaurants where the majority of Beyond Meat's products are sold. The company also said supply-chain disruptions and labor shortages hurt product distribution. Meantime, the latest results from Dow-30 component The Walt Disney Company (DIS) disappointed investors, and the stock is trading lower in pre-market action. The entertainment giant faced a double-edge sword in the latest quarter, with its movie and parks businesses still trying to rebound from the coronavirus-driven setback, while the streaming business, which was helped by more people staying at home during the height of the pandemic, is now witnessing slower growth. Conversely, the stock of Affirm Holdings (AFRM) is looking at a notably higher start today after the consumer financing firm raised its December-quarter revenue guidance and announced a broader e-commerce partnership with Amazon.com. Shares of fellow financial services provider SoFi Technologies (SOFI) also are pointing to a sharply higher opening after the company delivered impressive quarterly results following yesterday’s closing bell.
– William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
