Weakness in Retail
The broader retail space has been weak relative to the S&P 500 so far this year. Much of this weakness came after Target’s (TGT) and Walmart’s (WMT) earnings calls, in which management noted margin compression, inventory gluts in certain categories, shifting consumer preferences, and weakness in consumer spending as inflation in food and energy reduces discretionary budgets. Institutional subscribers can view our Conference Call Recaps on these two companies by clicking here. On a YTD basis, the VanEck Retail ETF (RTH) has underperformed the S&P 500 (SPY) by 4.5 percentage points, trading down by 18.2% as of today. A chart of the relative strength of RTH vs SPY over the last year is shown below.
Within the S&P 500, there are 21 stocks that make up the Retailing industry, and in the table below, we have outlined the performance of the 10 largest stocks by market cap. You’ll notice that companies like Costco (COST) and WMT aren’t listed, but that’s because they are actually part of the Food and Staples Retailing industry. As you can see, seven of these ten stocks are down more than the average S&P 500 member on a YTD basis, and six are further from their respective 52-week highs than the average S&P 500 member. However, only two of these stocks are below their pre-COVID highs, whereas more than a third of (35.8%) of S&P 500 components are below their pre-COVID highs.
Below are charts of each of the 10 stocks listed above since the start of 2019. Included on each chart is the percentage that each is off its 52-week high. As you can see, AutoZone (AZO), Dollar Tree (DLTR) and Dollar General (DG) have held up relatively well amidst broader market weakness, likely due to their positioning on the value chain. The market seems to believe that consumers will move down the value chain amidst rising inflation, which makes our latest Little Known Stocks Report even more compelling. Click here to become a Bespoke premium member today!
Bespoke’s Morning Lineup – 6/7/22 – Off Target…Again
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“The only thing you can be sure of is that there are times when large numbers of stocks are priced too high and other times when they’re priced too low.” – Benjamin Graham
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Everything seems to be trading lower this morning. Futures were already lower overnight, but Target’s (TGT) second profit warning in less than three weeks has dragged them lower. TGT is trading down over 9%, which is even more than the 6% that Bitcoin is trading down following proposed legislation in the Senate to regulate cryptocurrencies. Although the two senators bringing forth the legislation both just noted in an interview that they could see bitcoin as a diversified part of investor retirement portfolios.
In today’s Morning Lineup, we discuss the latest proposed crypto legislation (pg 4), the larger than expected rate hike in Australia (pg 4), market activity in Asia and Europe (pg 4), TGT’s warning (pg 5), and economic data out of Europe (pg 5).
TGT has long been considered one of the most well-run retailers in the United States, so when a company of its caliber is forced to revise guidance less than three weeks after already significantly cutting guidance, you can only imagine how hard this environment has been for businesses across the economy. In its announcement this morning, TGT pointed to a ‘rapidly changing environment’, ‘external volatility’, and ‘unusually high transportation and fuel costs’ as reasons for lowering Q2 margin guidance from 5% down to 2%. On the bright side, the company said that the actions it was taking now should help improve long-term margins in the second half of the year and that demand remained generally strong. You can’t fault the company for taking proactive steps to address conditions, but there’s no guarantee that the environment is suddenly going to stop ‘rapidly changing’, or that external volatility will suddenly abate, and it certainly doesn’t seem like transportation and fuel costs are going to decline from their ‘unusually high’ levels.
With the stock indicated to gap down close to 10% this morning, TGT has now declined 46% from its high less than seven months ago. For a stock that had a market cap of more than $125 billion late last year, a decline of this magnitude is significant, to say the least. TGT remains just about 10% above its pre-COVID peak so we can’t yet add it to the list of stocks that have unwound all of their post-COVID gains, but it’s getting close.
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Bespoke’s Morning Lineup – 6/6/22 – On the Rebound
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“The eyes of the world are upon you. The hopes and prayers of liberty-loving people everywhere march with you.” Dwight D Eisenhower
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It’s a bounceback Monday for the markets to kick off the week as news regarding China’s COVID restrictions and the country’s crackdown on the tech sector may be easing. Nasdaq futures are leading the charge higher, but the S&P 500 is also indicated to open up by over 1%. Oil is modestly higher, although off its earlier highs, Treasury yields are slightly higher, and crypto is sharply higher.
In today’s Morning Lineup, we discuss weekend developments in the Russia-Ukraine war (pg 4), the upcoming UK no-confidence vote (pg 4), and economic data out of China and the rally in that country’s tech sector (pg 5).
The week is starting off on a positive note for equities, but remember that today’s levels at the open still won’t be enough to erase last Friday’s declines. Additionally, all of the major averages are still trading below their 50 and 200-day moving averages, and they remain mired in pretty well-defined downtrends with a series of lower highs and lows. The only one of the three indices listed below that has broken its short-term downtrend is the Nasdaq 100, but it’s also seen the steepest declines. As we head into the new week, the Russell 2000 is down in six of the last seven weeks, and the Nasdaq 100 and S&P 500 are down in eight of the last nine weeks.
As far as individual sectors are concerned, it remains a case of Energy (XLE) and everybody else as the former is the only sector in overbought territory. The only other sectors even above their 50-DMAs at this point are Materials (XLB) and Utilities (XLU). If there’s any silver lining at this point, it’s that while most sectors remain below their 50-DMAs, only one (Consumer Staples, XLP) is actually at oversold levels.
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Bespoke Brunch Reads: 6/5/22
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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Real Estate
Big U.S. Cities Lost More Residents as Covid-19 Pandemic Stretched On by Paul Overberg and Janet Adamy (WSJ)
Among the ten largest cities in the country, only two (San Antonio and Phoenix) saw population grow last year, while cities with a resident population of less than 1mm but more than 500k saw aggregate declines as well. [Link; paywall]
The Hamptons summer rental market is facing an unexpected chill as inventory piles up and prices come down by Robert Frank (CNBC)
Travelers are moving further afield than the far end of Long Island and as a result demand for rentals in the Hamptons is crashing with summer demand falling well short of estimates. [Link]
States Help Business Owners Save Big on Federal Taxes With SALT-Cap Workarounds by Richard Rubin (WSJ)
Closely-held businesses are getting billions in tax benefits by skirting the SALT cap using a conversion that converts personal income taxes to business taxes. Regular wage earners are unable to enjoy the deduction. [Link; paywall]
Crypto
Crypto Goes Shopping for a Regulator It Can Push Around by Max Chafkin (Bloomberg)
The heaviest hitters in the crypto industry are pushing for regulation of the space to be taken on by the CFTC rather than the more aggressive and administratively powerful SEC. [Link; soft paywall]
Crypto Industry Sees Surge in Lawsuits as Investor Losses Pile Up by James Fanelli (WSJ)
Predictably, the near-inevitable cascade of losses emerging in the crypto industry are being litigated. Various flavors of fraud were being alleged even before the brutal fall in many crypto assets over the winter. [Link; paywall]
Financial Stability
‘Everything Is Terrible, but I’m Fine’ by Derek Thompson (The Atlantic)
Despite improving prospects thanks to higher checking account balances and incomes, Americans are feeling more dire about the national economy. Why? [Link]
The Racial Gap in Stock Market Participation (FRBSL On The Economy)
Across all income brackets, far fewer Black Americans hold investments in the stock market, with roughly one-third of the stock market participation of white households depending on income levels. [Link]
Missed Payments, Rising Interest Rates Put ‘Buy Now, Pay Later’ to the Test by AnnaMaria Andriotis (WSJ)
Wildly popular installment plans which allow consumers to purchase items immediately and pay for them over four or more later payments are proving more expensive for lenders than anticipated. [Link; paywall]
Streaming
Ted Sarandos Talks About That Stock Drop, Backing Dave Chappelle, and Hollywood Schadenfreude by Maureen Dowd (NYT)
A profile of Netflix CEO Ted Sarandos, featuring nautical musings, personal tragedy, layoffs, and Hollywood schadenfreude. [Link; soft paywall]
Fantasy Football
Mike Trout Would Rather Talk About the Angels by Tyler Kepner (NYT)
You know your fantasy football league is getting a little bit carried away when it leads to an on-field fight between two of its members. [Link; soft paywall]
Retro
The Wall Street Hotel Aims to Make 1700s-Era Finance Cool Again by Nikki Ekstein (BNN Bloomberg)
Lower Manhattan is being graced by a new place to stay: a new 180 room hotel located just across the street from the literal roots of the New York Stock Exchange. [Link]
Sanctions
U.S. Technology, a Longtime Tool for Russia, Becomes a Vulnerability by Ana Swanson, John Ismay, and Edward Wong (NYT)
The flow of critical inputs in to Russia via imports from a range of countries has slowed to a trickle, and that poses major challenges to Putin’s ability to make war in the Ukraine, let alone operate a modern economy at scale. [Link; soft paywall]
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Have a great weekend!
Revisiting The 50/50 Club
Amidst all of the craziness in growth/meme stocks in early 2021, we took a look at the Russell 3000 stocks that were both 50%+ off their 52 week highs and still 50%+ above their 52 week lows to show some of the most volatile names in the market last May. Today, we are revisiting that club to show some of the growth names that have gotten hammered since last May but have recovered substantially off of their lows recently. Much of this craziness is resembled through Cathie Wood’s ARK Innovation Fund (ARKK), which is now about 20% above its lows on 5/11 but still 67% off its 52 week high.
Currently, there are 33 Russell 3,000 stocks with a market cap of at least $1 billion that are 50%+ below their 52 week highs and 50%+ above their 52 week lows. These 33 stocks are outlined below, and every single one of them are still below their 200-day moving averages. However, only 12 are below their 50-DMAs. The average stock on this list is 67.3% off its 52 week highs (median: 65.4%) and 68.9% above its 52 week low (median: 60.6%).
There are a few notable names on this list, including the new-to-market EV manufacturer Rivian (RIVN), the famed meme stock GameStop (GME), the Metaverse Index component Unity Software (U), the digital platform engineering company EPAM Software (EPAM), and the EV charging station company ChargePoint (CHPT). CHPT is up 63% from its lows on May 11th. EPAM has already doubled since its lows in March. While it may not seem like much if you own the shares a lot higher, these names have recently seen massive bounces off of their lows. If you’re a Bespoke Premium member, you can click here to track this basket of stocks going forward! Click here to become a Bespoke premium member today!
Bespoke’s Consumer Pulse Report — June 2022
Bespoke’s Morning Lineup – 6/3/22 – Jobs Day
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“Work takes on new meaning when you feel you are pointed in the right direction. Otherwise, it’s just a job, and life is too short for that.” – Tim Cook
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In the middle of the night, it was looking like it was going to be a positive start to the last trading day of the week, but then news of the Musk ‘super bad’ memo filtered out where the CEO said he wants the company to cut 10% of its workforce citing concerns over the economy. Ever since then futures have been moving steadily lower and are currently indicating a 0.65% decline at the open. Obviously, that could change considerably with the release of the May employment report. Overseas in Europe and Asia, we haven’t seen nearly the degree of negative sentiment in those equity markets as Asia was higher, and Europe is pretty much flat. Treasury yields are little changed across the curve, and crude oil is down modestly.
The May Non-Farm Payrolls report was just released and the headline number was modestly stronger than expected 390K vs 325K. The Unemployment Rate was unchanged at 3.6% versus expectations for a decline to 3.5%. The average workweek was in line with forecasts (34.6) and average hourly earnings rose slightly less than expected (0.3% vs 0.4%).
In today’s Morning Lineup, we discuss Musk’s memo (pg 4), activity in Asian and European markets (pg 4), and selected economic data from Asia and Europe (pg 5).
Don’t call it a comeback, but if (pretty big if at this point following the TSLA news) the S&P 500 can manage to drop less than 0.45% today, it will mark the second straight week of positive returns for that index. The chart below shows the rolling six-month total number of positive weeks for the S&P 500. Just two weeks ago, after a streak of seven weekly declines, the rolling number of positive weeks dropped below ten for the first time since 2011. What’s also notable to highlight is that in early May, the S&P 500 ended a ten-year run where the six-month average never dropped as low as ten, and that was the longest streak without a reading that low in the entire post-WWII period. The prior record was ten years from early 1991 through early 2001.
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Seasonal Shifts For Jobless Claims
It was a mixed morning for labor market data. What could be a bad omen for tomorrow’s Nonfarm Payrolls number, ADP’s monthly payroll report showed the weakest month of job creation since the start of the pandemic. On the bright side, this week’s initial jobless claims number continued to reverse off of recent highs dropping back down to 200K. While the levels from February through April were even stronger, this week’s reading remains impressive nonetheless with the only comparable levels being during the two years leading up to the pandemic as well as all the way back in the late 1960s.
From a seasonal perspective, tailwinds are likely to become headwinds over the next couple of months. As shown in the second chart below, the current week of the year has historically been when unadjusted jobless claims have put in a seasonal low. That is typically followed by several weeks of consistent weekly increases that lead to a short-term peak usually in mid-July. In other words, it should not be surprising to see claims move higher in the weeks ahead, but regardless of any seasonal moves, this week did mark the lowest reading for the comparable week of the year since 1973. That reaffirms the seasonally adjusted reading in that claims are at impressively low levels.
Although initial claims have come off the lows and are likely to keep doing so as seasonal trends shift, continuing claims keep hitting new lows. This week’s reading fell all the way down to 1.309 million from 1.343 million last week. That is now the lowest level since the last week of 1969. Click here to learn more about Bespoke’s premium stock market research service.
Sentiment Swings Back to Optimism
Sentiment has taken a big swing higher across surveys this week as the S&P 500 has experienced some upside mean reversion. The weekly AAII sentiment survey has seen bullish sentiment rebound from a sub-20% reading all the way back up to 32%. Relative to the historical average of 37.84%, that reading continues to show a depressed level of optimism for individual investors, but it is the strongest reading since the week of March 24th. As for the 12.2 percentage point jump in bullish sentiment week over week, it was the largest one week gain since the week of October 14th of last year when it rose 12.4 percentage points.
As bullish sentiment surged, there was a massive 16.4 percentage point drop in bearish sentiment. That was the largest one week decline in the reading on pessimism since July 15, 2010 when it fell 19.27 percentage points. Now at 37.1%, bearish sentiment is at the lowest level since the end of March.
Such a large decline in bearish sentiment in only one week has pretty much been unheard of in the post Financial Crisis years. Again, July 2010 was the last time bears fell by at least 15 percentage points and before that there are only about two dozen other occurrences without another instance in the previous three months. While it was a big decline, bearish sentiment remains fairly elevated at 37.1%, but that is inline with most other occurrences since the mid 2000s whereas bearish sentiment was generally lower from the occurrences before 2005.
As for how the S&P 500 has tended to do following these massive bearish sentiment shifts, the S&P 500 has generally tended to move higher with outperformance versus the norm on a median basis one week and one month out. Although again performance is consistently positive, the size of gains have tended to be below or more inline with the norm three, six, and twelve months out from these occurrences.
After the large moves in bulls and bears this week, sentiment continues to favor pessimism but to a much smaller degree than recent weeks as the bull bear spread narrowed to -5.1 points. Click here to learn more about Bespoke’s premium stock market research service.
Gun Background Checks Fall
Although not a widely accepted indicator, we like to look at the number of NICS firearm background checks as a barometer for fear and geopolitical volatility for the United States. In uncertain times (like the beginning of government-imposed COVID lockdowns), background checks tend to spike. Inversely, when times are good, background checks tend to decline. An additional causal factor of background check spikes is the outlook on gun policy. When the public feels as if gun policies are going to become stricter, Americans tend to rush to purchase firearms, which is evidenced by the record y/y increase after President Obama was reelected. Recently, several mass shootings have brought gun control regulations back into the news cycle, so one would expect to see background checks tick higher. Granted, much of this rhetoric really picked up towards the end of the month, so any effects will likely be seen in June (or later) numbers. Nonetheless, background checks declined for the second consecutive month after briefly spiking earlier this year. In May, checks declined by 27.4% y/y to just 2.3 million.
On a YTD basis, background checks have fallen by 30.7%, the largest first five-month decline since at least 2000.
Although the decline is certainly significant, monthly background checks are still comfortably above their longer-term trend line. To summarize, although checks are down significantly y/y, the long-term uptrend that was in place prior to the COVID surge is still largely intact.
Although we like to think that the market is forward-looking, the price action of gun manufacturer Sturm Ruger (RGR) tends to be highly correlated with the number of background checks over the prior twelve months. Since the start of 2000, RGR’s end-of-month close and the trailing twelve-month background check figure has held a correlation coefficient of 0.90, a near-perfect positive relationship. Therefore, a reversal in the downside momentum of background checks as Americans step up purchases in advance of perceived or actual new regulations in gun ownership would leave room for upside in RGR.
Looking at the last twelve-month price charts of two firearm manufacturers, a relatively similar pattern emerges. RGR and Smith and Wesson (SWBI) are both in sustained downtrends. However, both have seen consolidation as of late, and SWBI is even testing its trendline. The decline has been warranted due to the significant decrease in background checks (and in turn firearm purchases), but a reversal higher in checks would likely provide a tailwind for both companies. Click here to become a Bespoke premium member today!
