Market in brief
The Dow Jones ended up slightly 0.08% for the first session of the week as the NASDAQ fell 1.20% and the S&P 500 lost 0.39% as the fall of tech stocks dragged the indexes down. Investors are still worried about slowing US economic growth, Federal Reserve interest rate hikes and soaring inflation that is shaking market sentiment.
The three main indexes have recorded heavy losses since January; the Dow is down 12.8%, the S&P 500 16.8%, while the NASDAQ has racked up losses of 28% since November.
“The S&P 500 is quickly approaching a level that, historically, has indicated that future growth concerns are priced in,” Citi analyst Scott Chronert wrote in a note. “The S&P 500 is still trading as though it’s experiencing a growth scare, a framework that has been pointing to the downside in the S&P 500 to ~3,850,” RBC Capital Markets strategist Lori Calvasina wrote. “Current trends in economic forecasts continue to support the idea that this is the right way to think about how far stocks should fall, though we remain mindful that could change.”
Twitter fell 8.20% to 37.38 dollars, thus losing all the gains accumulated since the announcement of the purchase of the company by Elon Musk. Tesla’s stock also had a bad session, down 5.88%.
After seven weeks down, its longest bearish streak since 2001, the Dow regained momentum on Tuesday, ending the session up 431.17 points. The S&P 500 also had a good day, closing up 2.02% while the NASDAQ gained 2.76%.
“The market is in the middle of a powerful moment where it’s digesting a major and relatively rapid change in expectations for monetary policy and what financial conditions should look like to keep inflation under control,” Lauren Goodwin, economist and portfolio strategist at New York Life Investments, said by phone. “And so we’ve already seen a lot of tightening in market financial conditions.”
It was a good session for Citigroup and Paramount Global stocks, after Warren Buffet’s company, Berkshire Hathaway, disclosed its holdings in both companies. Citigroup shares posted gains of 7.6% following the news of the conglomerate nearly $3 billion stake in the bank which has racked up losses of 34.1% for the past twelve months.
Same story for Paramount Global stock which also jumped nearly 15.4% following Berkshire’s announcement of a $2.6 billion stake in the company at the end of March.
Home Depot advanced 1.7% after publishing better than expected quarterly results. The company also announced that it has raised its outlook for the full year as consumers continue their renovation project started at the start of the pandemic.
The markets recorded their biggest daily losses in two years on Wednesday; the Dow fell 3.57% to 31,490.97 points; the NASDAQ fell 4.73% to 11,418.15 points while the S&P 500 lost 4.03% to 3924.18 points.
Target’s shares plunged 24% after reporting disappointing results. Like Walmart and other major chains, the company blamed rising commodity and oil prices that weighed on its profits. For investors, this is a bad sign for the forecasts for the next quarter. Target’s announcement dragged its competitors down, Walmart fell 7%, Costco fell 12.45%, Best Buy lost 11% while Dollar Tree lost 14.42%.
“Today’s sell-off is about companies’ ability to pass on higher costs. We asked ourselves the question, well we got the answer in a way with the results” from Target in particular, explained Quincy Krosby, chief strategist for LPL Financial.
“Certainly, consumers continue to spend, but many of the major retailers are unable to pass on labour costs and higher prices driven by a still constrained supply chain,” he said.
“The consumer is challenged,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “We started to see at the end of the year that consumers were turning to credit cards to pay for the rise in food prices, rise in energy prices, and that’s actually gotten much worse… This is going to hurt those bellwether retail places and Walmart tends to be one of them.”
It was another tough session Thursday for the indexes as the Dow lost 236.94 points, the NASDAQ fell 0.26% and the S&P 500 fell 0.58%. The poor results of companies from the retail sector are worrying investors. It was Kohl’s and Bath & Body Works turn on Thursday to unveil quarterly results that were worse than expected while lowering their forecasts for the next quarter. Stocks from this sector continued their poor performance on Thursday; Walmart (-2.74%), Target (-5.07%), Best Buy (-3.04%) and Costco (-1.51%) all had a bad session.
“The sharp sell-off in these companies (as well as other goods/consumer companies this quarter) shows that inflationary pressures are finally having an impact on earnings,” Maneesh S. Deshpande, head of U.S. equity strategy at Barclays, said in a Thursday note. “Despite heightened inflation for a better part of a year, [S&P 500] margins and forward earnings have remained resilient, which no longer seems to be the case.”
The same scenario for Cisco, which also unveiled lower earnings while saying that investors should expect lower income for the next quarter. Its stock fell by 13.73% Thursday at the end of the session.
Stocks opened Friday session higher, supported by China’s announcement of measures to support its economy, offering a note of optimism to investors. The Dow started the day up 197 points, the S&P 500 advanced 0.9%, while the NASDAQ recorded gains of 1.2%.
“While many cross-currents are causing the current sell-off, the proximate cause of the recent acceleration in the stock declines revolves around fears about the U.S. consumer,” Glenview Trust CIO Bill Stone wrote. “For the first time in the post-Covid period, retailers have been stuck with some excess inventories. Costs due to inflation are also taking their toll on their earnings.”
However, the gains recorded at the start of the day were brief as the three main indexes retreated in the middle of the session.
Oil
Oil prices were gaining ground on Monday, rising 3% allowing the energy sector to rack up gains of 2.6%. Occidental Petroleum stock jumped 5.7% while Marathon Oil advanced 3.6%.
The price of a barrel of oil fell on Tuesday, as a possible lifting of the oil embargo imposed by the United States on Venezuela in 2019 put pressure on supply. “The road to successful negotiations with Venezuela is still under construction,” said Andy Lipow. “If this materializes, we could see several hundred thousand barrels hitting the market immediately.”
“Keep in mind that Brent is for July while WTI is for June,” commented Andy Lipow of Lipow Oil Associates, with the earliest oil delivered enjoying a premium in such a tight market.
“However,” he added, “what it says is that refiners everywhere are looking for an alternative to Russian oil. As a result, we see an increase in demand for American production.”
Prices were back up on Wednesday morning to finally end the session down 2.50%, still evolving in a rather volatile environment. “Oil prices are moving modestly higher this morning after WTI passed Brent for the first time since 2020,” said Victoria Scholar, analyst for Interactive Investor.
“As the global economy seeks to reduce its reliance on Russian oil, alternative sources have been called upon with declining US crude reserves, pushing WTI prices above the global benchmark,” he said.
“Despite the pessimism and predictions of recession, retail sales, manufacturing production and industrial production in the United States all posted excellent figures last night,” also participating in the support of oil prices by reassuring on the demand in the country’s largest consumer of black gold, estimates Jeffrey Halley of Oanda.
The possible end of the lockdown in China brought hope for demand on Wednesday, allowing oil prices to rise.
“The lockdown in Shanghai, which has been in place since the end of March, has weighed considerably on oil demand. Crude oil processing in China dropped to 12.6 million barrels per day in April, which was the lowest level since March 2020, i.e. during the first coronavirus lockdown,” said Carsten Fritsch, commodity analyst at Commerzbank, in a note.
It was another volatile session for oil prices on Thursday, which eventually racked up 2% gains by the end of the day. “The market is extremely volatile with big gains one day, large losses the next,” noted Andy Lipow of Lipow Oil Associates.
For John Kilduff of Again Capital, “because of the very tight supply situation, the market is overreacting to any news. Every barrel counts! There has been a significant decline in the dollar, -1% for the Dollar index, and that has helped push prices higher as US oil exports become cheaper,” Kilduff said.
Walmart
The company released earnings Tuesday morning below analysts’ expectations, posting net profit down 25% in the first quarter of its staggered fiscal year. However, Walmart estimates that it expects its net sales to increase by about 4%. “US inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected,” Walmart Chief Executive Officer Doug McMillon said in the statement. “We’re adjusting and will balance the needs of our customers for value with the need to deliver profit growth for our future.”
The company announced in its earnings a drop in its profit forecasts for the next quarter, threatened by rising oil and food prices. Indeed, higher costs of goods, transport and labour increasingly threaten profitability. The company that has been promoting lower prices for years is now struggling to attract consumers who are looking for better deals. Walmart also announced that it would have to increase its prices while remaining competitive.
Its stock has racked up gains of 2.4% since the start of the year and ended the session down 11.38%. Walmart is dominant in its sector, accumulating an impressive number of stores as well as a leading position in national grocery sales. Thus, it serves as a barometer for US consumer sentiment and its earnings are closely watched by investors, allowing them to better analyze the health of the US economy.
“Overall, Walmart is in a solid place,” Neil Saunders, managing director of GlobalData said.
“However, it is now entering a much leaner period where the absolute necessity of maintaining a low-price proposition will likely mean that profitability and margins come under increasing pressure.”
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