Bespoke’s Morning Lineup – 7/26/22 – Walmart (WMT) Comes Out of Left Field
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“A good thing never ends.” – Mick Jagger
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We said it was going to be a busy week yesterday, and that didn’t even include the surprise earnings warning from Walmart (WMT) after the close. While WMT shares are down sharply, it’s surprisingly having little impact on the broader markets where futures are only modestly lower heading into the open. Where they finish the day will be another story, and then after the close, we’ll hear from Alphabet (GOOGL) and Microsoft (MSFT) which are likely to have a bigger impact on how markets trade tomorrow.
Outside of equities, longer-term Treasuries are rallying this morning and sending the 10-year yield down to 2.74% and flattening the 10y3m portion of the yield curve down to just 26 basis points (bps) and closer to inverted levels, but don’t worry “it’s different this time”. As mentioned above, WMT’s warning was somewhat out of left field, and the timing was interesting as it came right before this week’s Fed meeting. It will be interesting to see what, if any, impact the WMT news has on the thoughts of FOMC members.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, the geopolitical impacts of Pelosi’s planned visit to Taiwan, economic data from around the world, and much more.
First, it was Target (TGT) in May, but yesterday it was WMT’s turn to issue a rare earnings warning outside of its regularly scheduled quarterly earnings report. As noted in last night’s Closer, the company noted that “increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars”. In response to the warning, shares of the retailer plunged close to 10%, and if those levels hold into the opening bell, it will be the stock’s largest downside gap since the 1987 Crash. Including today’s decline at the open, today will be WMT’s second downside gap to make the top ten (since 1985) this year. The only other year with two entries on the list is 2020 in the middle of the COVID crash. There weren’t even two declines of similar levels during the Financial Crisis!
Looking at the chart below, it’s amazing to see how strong WMT was in the late 1980s and 1990s only to stall out, relatively speaking, at the turn of the century. Including dividends, WMT stock has had an annualized return of 4.32% from 12/31/99 through the opening bell today compared to the S&P 500’s gain of 6.5% over that same period.
While the largest downside gap since the 1987 crash may seem a bit excessive, keep in mind that as of yesterday’s close (before the warning was released), WMT was only down about 8% YTD and trading at a premium to the S&P 500 as investors viewed it as a port in the storm. At the opening bell today, WMT will be down less than 18% YTD, which is only slightly weaker than the S&P 500, with a valuation much closer to inline with the broader market. In bear markets, there are no ports.
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Daily Sector Snapshot — 7/25/22
Demand Decimation Out of Dallas
Manufacturing data has continued to cool with the Dallas Fed’s monthly survey showing further deterioration in the month of June. The reading on General Business Outlook dropped another 4.9 points month over month to -22.6; the worst reading since the spring of 2020. Expectations are similarly at some of the lowest levels in over two years, but July did see a modest rebound.
The individual categories of the report were mixed. While most remain in expansionary territory, some of the more important categories like New Orders are in deep contraction. The month-over-month moves were even more mixed as just over half of the components fell. As we have seen across other regional Fed reports recently, expectations broadly sit at much more depressed levels, although July did see some big rebounds across categories.
Even though demand has slowed, production expanded at a slightly accelerated rate in July. At only 3.8, though, the index is in the bottom quartile of its historical range and capacity utilization is only slightly stronger.
Manufacturers reported the worst slowdown in demand since the spring of 2020 as the index for New Orders fell to -9.2. The 1.9 point sequential decline was actually much smaller than the 10.5 point and 8.9 point declines in June and May, respectively, however that nonetheless expresses demand has been weakening materially. As new demand is a fraction of what it once was, Unfilled Orders experienced a peculiarly large uptick of 14.9 points. That ranks in the top 2% of all monthly moves on record resulting in the index to flip from a historically weak to a more solid reading.
The Dallas Fed report added to the list of indicators pointing to alleviation on the supply chain front as well. The Delivery Times index experienced its second-largest one-month decline on record. Even though that brings the index to a barely expansionary level, the move heavily contrasts with expectations. Future Delivery Times recorded the largest month-over-month gain on record. Given that reading brings the index only to 2.4, it does not mean manufacturers expect delivery times to begin to surge to unprecedented levels as they did earlier in the pandemic. Rather, they no longer expect the rapid improvement that has been observed over the past several months.
As for other metrics that have fallen off a cliff, likely thanks to the easing of supply chain bottlenecks, both Prices Paid and Received are plummeting across both current and future conditions.
In addition to the decline in prices paid and received, the indices tracking the growth of wages and benefits has also been pulling back sharply. Both current conditions and future expectations saw some of their largest one-month declines on record, although, at current levels, they remain more elevated within their historical range than prices paid and received. The employment index peaked well over one year ago, but it has not experienced that same sharp decline as wages in benefits. In fact, there was a modest rise in the reading in July meaning firms increased hiring at an accelerated rate. Contrasting with that higher spending on employment, the capital expenditures index has been consistently grinding lower with this month marking the fourth monthly decline in a row, and at 4.2, it has fallen to the lowest level since October 2020. Click here to learn more about Bespoke’s premium stock market research service.
B.I.G. Tips – Mega-Cap Earnings
Chart(s) of the Day – Downtrends Entrenched But Some Green Shoots
4th Longest Streak of Declines in Prices at the Pump
The price of a gallon of gas, while still up YTD and relative to most other periods in the past, has pulled back considerably and consistently over the last six weeks. While a gallon of gas topped $5 in early to mid-June, over the weekend, the average price was back down to $4.36. The decline in prices has also been consistent as prices have now declined for 41 straight days. Going back to 2005, when AAA began tracking the daily national average price, this current streak now ranks as the fourth-longest on record after surpassing the 39-day streak from September 2006 over the weekend. In order for this current streak to move into the top three and oust the 62-day streak from the COVID crash, we’ll need to see another three weeks of daily declines, and in order to move into first place overall, we’d need to see the current streak nearly triple in length to 118 days and stretch out to early October!
While the current streak of declines is the fourth-longest on record, the magnitude of gasoline’s decline over the last 40 days hasn’t been quite as extreme. At -13%, there have been seven other periods where average prices at the pump experienced a larger decline over the same time period. What is notable, however, is that back in March the 40-day rate of change was the second highest on record trailing only the 33% increase that came in the wake of Hurricane Katrina in September 2005.
In order for prices at the pump to keep declining, we’re going to need oil prices either to stay around current levels or continue declining. Oil prices have obviously been weak for the last month or so, but over the last two weeks have shown some stabilization above the 200-DMA, including two different days when the price dropped below the 200-DMA intraday but bounced. If the 200-DMA holds in the near-term, gas prices are likely to stop declining, so this will be a key level to watch for what will ultimately determine the health of the consumer. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 7/25/22 – The Week We’ve All Been Waiting For (Or Dreading)
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“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” – Harry Truman
Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members. Start a two-week trial to Bespoke Premium now to access the full report.
The weather has been hot across much of the country the last several days, and that heat will move to the markets this week with a busy schedule of economic data, peak earnings season, and the FOMC announcing its latest policy decision.
Ahead of the kickoff of trading, equity futures and bond yields are modestly higher along with crude oil and copper. On the downside, Bitcoin is down over 3% while gold is flat. Over in Europe, Germany’s ifo index tracking the business climate fell more than expected as a recession looks increasingly likely.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, economic data from around the world, and much more.
With all the earnings and economic data on the calendar this week, investors will likely have a much better read on the economy and its direction on Friday. Several indicators have already pointed to the increased likelihood of a recession, and the yield curve has also been indicating a more precarious economic picture. While the spread between the yields on the 10-year and 2-year US Treasuries has been negative for three weeks now, the spread between the 10-year and the 3-month yields has yet to move to inverted levels. A few months ago, the relative steepness of the Fed’s preferred yield curve measure was cited as a reason why a recession was not in the cards. However, after flattening by nearly 200 bps to just 40 bps in the last three months, even this part of the curve (light blue line) looks much less comforting.
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Bespoke Brunch Reads: 7/24/22
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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Human Resources
The job market is beginning to show cracks by Abha Bhattarai and Lauren Gurley (MSN/WaPo)
As financial markets take a header, spending on high-end goods and services is starting to slow and the result is a weaker job market; layoffs are also being announced across mortgage lenders, auto manufacturers, convenience stores, and more. [Link]
With Few Able and Fewer Willing, U.S. Military Can’t Find Recruits by Dave Philipps (Yahoo!/NYT)
Enlistments have plunged thanks to COVID-19, strong labor markets, and less cultural interest in the military, leading to higher enlistment bonuses and more aggressive recruiting tactics. [Link]
Cost of Living
People Are Losing It Over These $90 Chicken Tenders In Montauk… (Guest of A Guest)
Hamptons life has always been an expensive proposition, but one menu item in a Montauk haunt caught social media attention this week as a particularly egregious bit of price gouging. [Link]
Inflation for Americans at each age (USA Facts)
A fascinating infographic that re-weights CPI to show how inflation impacts people with different ages, since consumer spending patterns vary across the age spectrum. [Link]
America’s favorite family outings are increasingly out of reach by Zachary Crockett (The Hustle)
Widely-accessible leisure activities that used to be par for the course are now completely out of reach for most families: baseball games, movies, and Disneyland trips have all more than doubled in cost. [Link]
Life Science
Blots On A Field? By Charles Piller (Science)
A short seller-funded tear-down of groundbreaking science tying protein plaques to Alzheimer’s disease has turned out to be little more than a mirage and may even rise to the level of fraud. [Link]
New York reports 1st US polio case in nearly a decade by Mike Stobbe (AP)
An unvaccinated person has been paralyzed by the polio virus in New York, with the virus originally coming from a live-virus vaccine that is not available in the United States and must have been transmitted to the patient by someone visiting the US. [Link]
‘Holy grail’ of blood tests could diagnose any type of cancer years in advance (Study Finds)
Many cancers appear to release a protein marker in the early stages of a tumor’s development, when the disease is much easier to treat. [Link]
Politics
A guide to Chile’s constitutions, old and new by Ana Lankes (Medium)
Chile’s constitution has been re-written and will go to a plebiscite later this year. Some history on why the re-write took place and how it looks like it might fare in the approval vote. [Link]
Black Districts Gutted as Suburban Flight Reshapes Congress Maps by Gregory Korte (Bloomberg)
Once a staple of multiracial democracy in the United States, majority-Black Congressional districts have started to disappear in the wake of the Supreme Courts paring-back of the Voting Rights Act. [Link; soft paywall]
Energy
BlackRock Is Buying Renewable Natural Gas Producer for $700 Million by Amrith Ramkumar (WSJ)
While natural gas produced from manure and food waste is still expensive, the market is growing as investors and customers look for gas that is produced from a closed loop rather than extracted from the ground. [Link; paywall]
Sizewell C nuclear plant gets go-ahead from government (BBC)
The UK is moving to expand existing nuclear facilities in Suffolk, with French utility Electricite de France leading the project which will cost tens of billions and see 3.2 GW of electricity supplied with a useful life of 60 years. [Link]
The curious incident of the gas and the turbines by Alexandra Scaggs (FT Alphaville)
A fascinating dive into a financial markets rumor that spread like wildfire and proved to be deeply misleading in terms of actual government policy. [Link; registration required]
Weird News
Final DIY Project: Build Your Own Coffin by James R. Hagerty (WSJ)
It’s one thing to pick your coffin out before you go, but entirely another to build it by hand and have it ready when you kick off this mortal coil. [Link; paywall]
JPMorgan Trader Spoofed So Fast Colleagues Urged Ice on Fingers by Eddie Spence (Bloomberg)
A trader working at Bear Stearns and JPMorgan in the 2000s reportedly spoofed orders so aggressively that colleagues suggest he ice down his hand. [Link; soft paywall]
Media
Media Confidence Ratings at Record Lows by Megan Brenan (Gallup)
Gallup’s tracking of confidence in newspapers and television news has fallen to record lows over the last few years, with only 11% of people reporting “a great deal” or “quite a lot” of confidence in television and 16% for newspapers. [Link]
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Have a great weekend!
The Bespoke Report – 7/22/22 – You Ain’t Seen Nothing Yet
This week’s Bespoke Report newsletter is now available for members.
This week’s Bespoke Report covers everything in the markets this week from the weaker economic numbers to the early indication for this earnings season. We also looked at the significance of some key technical events this week as well as what to expect from the FOMC ahead of next week’s FOMC meeting. To read all about it these events as well as the latest Technical, Sentiment, Historical, and Fundamental trends make sure to check out this week’s report.
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