Capital 19 Catch-Up

Dow and S&P500 Hit New Records as Nasdaq Continues To Be Dragged Down By Big Tech

Despite a non-farm payroll number that fell shockingly short of economist estimates, the Dow and the S&P500 both managed to close out last week at all-time highs, as a soaring Friday session saved an otherwise quiet week. It seems the “bad news is good news” trade is back on again which is bound to create an interesting dynamic as the US economy continues to reopen over the next six months.

The Dow closed the week up an impressive 2.7% in an otherwise difficult market. The Benchmark S&P500 did the same, rising 1.2%. The Nasdaq however, didn’t find the going as easy as the big technology companies lost favour again with investors. The Daq experienced losses in the first four sessions of the week, its longest losing streak since last October, and fell 1.5% over the five sessions to continue its run of weekly losses.

Inflation fears are still the major concern on Wall Street and any overly strong economic data gets investors thinking immediately about interest rates and bond buyback schemes. So when the payroll figure revealed only 266,000 jobs had been added in April, when the market was looking for more than 1 million, shareholders breathed a little sigh of relief. It’s crazy of course. More workers being employed is much better for companies in the long run. The market, however, values free money above all else. To a company, low-interest rates and Fed stimulus injections are like sugar hits are to a three-year-old.

Earlier in the week, the Oracle of Omaha himself, Warren Buffett, had warned of seeing “very substantial inflation” with costs rising across his breadth of companies. Speaking at the annual meeting following Berkshire Hathaway’s (BRKB) earnings release he stated “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted…..We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up”.

Despite the rising prices, Berkshire earnings were up 20% from a year ago, hitting $7.018 billion. The conglomerate owns and operates a wide variety of business across the spectrum, taking in insurance, transportation, utilities, retail and manufacturing, so it’s a great sign that economic reopenings are lifting profits across the board. The BRKB cash pile grew by 5% to $145.4 billion in the quarter, even with the company purchasing $6.6 billion in share buybacks. The excess cash has been sitting on the sidelines as the oracle waits for an attractive acquisition to come along.

In their monthly meeting in the previous week, the Fed stated that they expected to see inflation rise temporarily, then settle back down to the central bank’s target of around 2%. They have resolved not to raise interest rates until the economy sees full and inclusive employment. It’s why the market loved the poor non-farm payroll result. Along with unemployment rising to 6.1% when the market was expecting it to remain at 5.8%. A full recovery of the employment market is still a long way off, as are any rate rises.

Those in the east of the US heard some positive news earlier in the week as NY Governor Andrew Cuomo announced capacity restrictions were being lifted in New York, New Jersey, and Connecticut. Reopening stocks bounced on the news, with a particularly strong rise in the bricks and mortar retail sector. Gap (GAP) rose more than 7%, Macy’s (M) was up 8%, Dillard’s (DDS) gained almost 10%, while Urban Outfitters (URBN) and Kohls (KSS) both made more than 5%.

In company news drug maker Pfizer (PFE) beat earnings estimates and raised guidance by more than expected which saw the share price rise by 1.5%. However, the Biden administration put the wind up the sector on Wednesday announcing they would support waiving intellectual patent protects for coronavirus vaccines. The move is intended to have vaccines more easily accessible on a global scale as more manufacturers in emerging countries can join in and produce them.

As its stands, 51% of the Uk and 44% of the US have been vaccinated, compared to 25% in the European Union, 9.4% in India, 4.4% in Asia, and only 1% in Africa. On the day the patent waiver was announced vaccine maker Moderna (MRNA) beat profit estimates but missed on revenue and dropped 6%. While Pfizer lost its earnings impetus falling 5%.

In other earnings news, CVS Health (CVS) beat earnings estimates as covid vaccinations and testing boosted store sales. Its share price rose 4% as revenue increased to $69.1 billion and the drugstore chain raised guidance by more than $1 per share. Other winners included General Motors (GM) who also gained 4%, Activision Blizzard (ATVI) who rose 3%, and Capital 19 favourite Paypal (PYPL) who increased revenue by 31% and gained 1.9% for the day. It was disappointing news for online retailer Etsy (ETSY) however, who despite beating estimates warned that sales in the second quarter would decelerate compared to comparisons with last years numbers. Etsy dropped 14% following its release.

It was also a tough week for fitness equipment maker, and pandemic darling, Peloton Interactive (PTON) who fell almost 15% after voluntarily recalling their treadmill brands over safety concerns. The recall affected more than 125,000 Tread + machines and a little over 1000 of the new cheaper Tread version. The company advised they are working on a repair that will be offered to owners in the coming weeks. The Peloton share price is now down almost 50% from its highs back in December of last year, but still more than 200% higher than it was in March.

In the week ahead Wednesday’s Consumer Price Index will show us how concerned we need to be regarding inflation, with the Fed Vice-chairman Richard Clarida speaking straight after. Other data for the week will include the Producer price index, retail sales, and business inventories.

On the earnings front, we’ll see report cards from the likes of Tyson Foods (TSN), Electronic Arts (EA), Wendy’s (WEN), Alibaba (BABA), Airbnb (AIRB), and Catch Up favourite Walt Disney (DIS). The Wall Street Journal will also hold its “Future of Everything” conference which will include company updates from Salesforce (CRM), Abbott Labs (ABT), Facebook (FB), and Mattel (MAT).

Have a great week.