Given recent intraday volatility, there’s no telling where the market will finish the day, but the market’s open was weak.
Much of this weakness is because of the ongoing situation in Ukraine, the most recent concern being the Russian attack on a nuclear power plant, which resulted in a fire. Fortunately, that fire is now extinguished, but the Russians are in control of the facility. While the head of the International Atomic Energy Agency stated there was no release of radioactive material, investors were still bearish given the overall situation in the war zone. But the Ukraine crisis is not the only headline event of the day.
The monthly unemployment report was also released this morning. It showed the economy adding 678,000 jobs last month, beating expectations. Meanwhile, the unemployment rate dropped to 3.8%. This is a blowout number, and it helps to smooth out some of the inconsistencies or disappointments of recent reports from December and January. But for the Fed, while this is an interesting data point, if Chairman Jerome Powell were going before Congress today, I don’t think he’d say anything different from what he said earlier this week. Right now, the situation in Ukraine overshadows everything, and what happens in Ukraine will likely have greater impact on the markets in the short term than what the Fed does, although the Fed’s actions will of course have a longer-term impact throughout the year. However, if the Ukraine situation did not exist, this report along with the rise in commodity prices, would be putting even more pressure on the Fed to raise rates faster.
Taking a close look at the report, the only head-scratcher that jumps out is the average hourly earnings being zero month-over-month. It’s possible that could be attributed to a lift in leisure and business services, for example bars where employees rely heavily on tips or retail jobs that tend to be lower-paying, but it’s still somewhat confounding. The bottom line is though, we’re looking at a blowout number this month that, because of the current geopolitical situation, is just one important data point among many.
The 10-year Treasury is hovering around 1.8% this morning.
Perhaps the bigger concern, however, is inflation. Kroger (NYSE:KR) cited this in its earning call yesterday as its costs are rising. Both corn and wheat futures have had their strongest week in years, and crude futures are up another 3.0% after yesterday’s pullback. All these price increases are affected by the Ukraine crisis, and anyone who believes the war is not affecting them is mistaken.
Europe markets are down across the board before the opening of U.S. markets, with the European Stoxx 600 index down mid-day 2.6%, the London FTSE 100 down 3.2%, and the German DAX down 3.2%.
On the earnings front, shares of Gap (NYSE:GPS) were up 7% in pre-market after the company reported a smaller-than-expected loss but issued a strong forward guidance yesterday.
Costco (NASDAQ:COST) also reported earnings yesterday, beating on the top and bottom line and reporting improved same-store sales.
Stocks pulled back on Thursday as investors absorbed another day of testimony from Powell and waited for today’s Employment Situation report. The Dow Jones Industrial Average was down the least, closing 0.29% lower. The S&P 500 fell 0.53%, and the Nasdaq Composite dropped 1.56%. The tech-heavy Nasdaq was weighed down by the poor performance among technology stocks. Only the consumer discretionary sector fared worse than technology.
Investors appeared to favor defensive sectors as utilities, real estate, consumer staples and health care were the leaders. Investors also appeared to favor value stock to growth because the S&P 500 Pure Value Index rose 0.37%, while the S&P 500 Pure Growth Index fell 1.49%. Investors also seemed to prefer dividend stocks because the Dow Jones U.S. Select Dividend Index rose 0.65%, and with this move, the dividend index is about 2.5% off its all-time high.
Investors also got defensive by purchasing Treasury bonds and gold. The 10-year Treasury yield fell 1.13% as bond prices rose. Gold futures rose about 0.84% on the day and is currently about 6% below its all-time high set in August 2020.
Oil futures ended its three-day skyrocketing win streak on Thursday. After climbing another 4.6% and trading above $116 per barrel before the opening bell, oil futures actually turned around and closed the day 2.31% lower. Reports that the Iran nuclear deal could soon be signed and will allow Iran to start putting its oil back on the market. Similar volatility was also seen in gasoline and heating oil futures with each commodity closing down for the day.
Retailing Another Story
As the earnings season starts to get toward the unofficial end, it’s common to see a lot of retailers reporting. According to MarketBeat, Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) had the largest margin for beating estimates than any other retailer. These beats were by $24.18 per share and $14.95 per share, respectively. These results are outliers. In the next tier of beats, Dillards (NYSE:DDS), AutoZone (NYSE:AZO) and Booking (NASDAQ:BKNG) reported beating their estimates by $2 to $5 per share. These companies have done well during a time when retailers as an industry group have really struggled due lockdowns, supply chains, labor shortages, and more.
In the last six months, drug retailers like Walgreens Boots (NASDAQ:WBA) and CVS Health (NYSE:CVS) have had the best performance despite being slightly in the red. In November, specialty retailers like Best Buy (NYSE:BBY) and Dollar Tree (NASDAQ:DLTR) were looking to have a very strong holiday season but are now the worst-performing sub-industry group. Broadline retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT) have edged out apparel retailers like Nordstrom (NYSE:JWN) and Gap.
Many analysts still feel that the American consumer is strong. However, pandemic-related restrictions and rising inflation are making things hard on consumers. The Consumer Confidence Index (CCI) hit a high in summer 2021 but has started to fall as inflation began to grow at a much faster pace than expected.
CHART OF THE DAY: RETELLING RETAILERS. In the last six months, the broad Dow Jones U.S. Retail Index ($DJUSRT—candlesticks) has fallen 10.44%. The Dow Jones U.S. Drug Retailer Index ($DJUSRD—red) has been the top performer out of the group in the chart by falling just 0.3%. The Dow Jones U.S. Broadline Retailer Index ($DJUSRB—blue) has returned 13.59%. Dow Jones U.S. Apparel Retailers Index ($DJUSRA—pink) has fallen 15.45%. The Dow Jones U.S. Specialty Retailer Index ($DJUSRS—gray) has plunged 18.98%. Data Sources: ICE), S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Changing Confidence: The survey for the February CCI revealed that fewer people thought business conditions were good, but also fewer people described them as bad. Consumer outlooks on the job market were still near historic highs. When looking at the next six months, fewer consumers thought conditions would improve for business, and they were less positive about their own financial prospects.
Catch Up: While retailers are now struggling, they’re coming off some pretty good years. Before the pandemic, the Advanced Retail Sales report showed a total of $460 million in monthly sales for March 2020. In April, the amount dropped to $380 million, but by August, monthly sales were up to about $490 million. By April 2021, total sales were around $560 million, and in January 2022, they were just shy of $575 million, reflecting a little less growth in recent months.
Consumers may be swimming in “stuff” after two years of being home and shopping online. As more and more states and countries open to regular business activities, consumers will likely focus on services and experiences. I’ve mentioned before that the Fed is counting on this to help subdue the inflation the country is experiencing.