Close Menu
Finance

Stocks fall as cracks begin to show in the US economy

Max SmithBy No Comments7 Mins Read


U.S. stocks opened lower on Tuesday as investors weighed signs that cracks are starting to show in the surprising resilience of the U.S. economy.

The S&P 500 (^GSPC) fell 0.3% and the tech-heavy Nasdaq Composite Index (^IXIC) dropped 0.2%. Both indexes ended the previous trading day higher but followed a volatile day. The Dow Jones Industrial Average (^DJI) was down about 0.4%.

Stock markets are struggling to find their footing as investors are caught in a dilemma over the direction of interest rates. Recent weak manufacturing data has Wall Street strategists scaling back on the optimism about economic growth that would justify a rate cut. But Federal Reserve officials have warned not to expect a policy shift anytime soon, as they will wait until inflation calms down sufficiently. And it's not clear when that might happen.

For further clues on how the economy is holding up, attention will be focused on April jobs data due later on Tuesday. Factory and durable goods orders are also due. The labor market update will be a precursor to the crucial May employment report on Friday, the week's most watched data point.

Meanwhile, Gamespot (GME)'s rally, part of a summer of stock market mayhem, fizzled out on Tuesday after the meme darling surged 21%. Shares of the video game retailer fell about 4%.

Meanwhile, Indian stocks have plummeted after hitting record highs on Monday, wiping nearly $35 billion off their market capitalization, as vote counts call into question whether Prime Minister Narenda Modi's party can maintain its majority in a general election despite exit polls predicting a landslide victory.

live6 Updates

  • Stocks opened lower due to losses in the energy sector

    Stocks opened lower on Tuesday as weaker-than-expected manufacturing data raised concerns about the health of the U.S. economy.

    The S&P 500 (^GSPC) and tech-heavy Nasdaq Composite Index (^IXIC) were down about 0.3% after closing modestly higher on Monday amid volatility among the three major indexes. The Dow Jones Industrial Average (^DJI) was down about 0.2% after dropping more than 100 points in the previous trading session.

    Crude oil prices hit a four-month low on Tuesday, with the S&P 500 Energy Select ETF (XLE) leading the decline as traders continue to evaluate OPEC+'s latest plans for production cuts amid concerns about a supply glut heading into the end of the year. The oil alliance plans to extend most of its production cuts through 2025 but will phase out additional voluntary cuts starting in October.

    Recent data has shown a cooling in economic activity across a range of indicators, dampening hopes that U.S. economic growth will accelerate for a second consecutive year.

    The April jobs numbers, due out this morning, could be another indicator of how the economy is holding up. The labor market update is a precursor to the crucial May employment report due on Friday.

  • Bad fast food industry

    Fast food stocks are, well, cooling off.

    Wall Street has been very cool on a number of companies in recent months, including McDonald's (MCD), Restaurant Brands (QSR), and Yum Brands (YUM), as inflation continues to rage and a new price war rages over the $5 mark.

    In other words, there are no catalysts at all to push up stock prices in the short term.

    This point was underscored this morning by Evercore ISI analyst David Palmer, who lowered his same-store sales forecasts for the above stocks.

    I would like to highlight two interesting sections from his report.

    “U.S. drive-thru chains are weakening across most income groups, but the weakness is most pronounced among households earning less than $50,000 per year, who benefit less from rising asset prices and are hit harder by rising interest rates. Finally, it is these consumers who will experience the regressive effects of inflation the most, as the 30%+ food price inflation during the pandemic, combined with the high cost of eating out (more than four times more expensive than cooking at home), has created affordability challenges. Additionally, increased media and social media scrutiny of fast food pricing has increased pressure on McDonald's in particular.”

    and:

    “In the past, attractive value menus were often supported by hero items and were often viewed as loss leaders by consumers. These included $1 double cheeseburgers (McDonald's, 2003-2012), $1 free-size soft drinks (McDonald's, 2017-2020), $5 footlongs (Subway), $5 mix-and-match (Domino's), and $1.50 hot dogs (Costco). The question today is whether the $5 bundle will stabilize McDonald's traffic and whether the higher food cost of the meals is worth it enough to sustain them through the rest of the summer (or longer). If $5 meals aren't a long-term solution, will a BOGO dollar menu work for McDonald's? The answer appears to lie in advertising. Can McDonald's leverage its $1 billion national advertising budget? Will McDonald's be able to stabilize traffic with value in the third quarter? A steady stream of new product launches in the second half of 2024 and into 2025 should kickstart a significant recovery for the brand.”

  • Good point about Goldman stock

    And then I was woken up by a 16-page research report on Goldman Sachs stocks. Perfect for reading on the train.

    Some good points from the team about the stock:

    “But stocks are more vulnerable to disappointment, given rising valuations and the associated recent uptick in investor sentiment. So far, stocks have barely minded the delayed rate cuts, as growth has persisted. Cyclical sectors in major markets have outperformed defensive sectors, leaving them more exposed to signs of slowing economic activity (particularly around the labor market).”

  • Citi spent time with NVIDIA's CFO

    Nvidia (NVDA) CEO Jensen Huang gets all the attention, but if you're an investor in the company, its longtime CFO is also worth keeping an eye on.

    Colette Kress has been Nvidia's CFO for 10 years and is regarded on Wall Street as one of the best in the industry.

    Siti spent some time with her this week and came away with some notes, and what they said (based on their meetings with Kress) is interesting and, in our opinion, an under-discussed demand driver for this chipmaker:

    “Demand for Sovereign AI is strong around the world. In Europe, countries like France, Germany and Italy are making efforts, with France leading the way. The Middle East is also a region investing heavily in AI. Southeast Asia is similar. Nvidia made it clear that not all investors have direct ties to governments. Some companies are simply backed by governments, but not owned. Generally, Sovereign AI's clients already have a specific use case for using their products. Generally speaking, companies are looking to build models based on their own unique characteristics.”

  • Stifel's call to the markets

    I have no problem with strategists making bold decisions that are rooted in reality.

    I think that's exactly what we heard this morning from Barry Bannister of Stifel.

    Bannister said he expects the S&P 500 to fall 10% between the second and third quarters to around 4,750.

    why:

    • “Inflation is expected to remain steady (and slightly elevated) from early Q3 2024 through the second half of the year.”

    • “Despite slowing pro-cyclical economic growth, the Fed will not cut rates in 2024.”

    • “The S&P 500 price-earnings ratio will fall by roughly 2x (about 500 points) by the end of the third quarter.”

    Here's what Stifel CEO Ron Kruszewski told me recently about the Fed and the markets:

  • GameStop Conclusion

    GameStop (GME) shares are trading sideways in the early going after rising 21% at the start of trading today (a far cry from the 103% increase seen at the start of trading…).

    I think longtime market go-to Steve Sosnick of Interactive Brokers said it best in an email to me while on the road.

    “It cannot be explained by normal rational means.”

    Guys, be careful when following this.

    Here's some coverage from Yahoo Finance on this week's GameStop mania:



Source link

Share.

Related Posts

Add A Comment
Leave A Reply