18 May Capital 19 Catch-Up
Markets Pull Back as CPI and Retail Sales Falls Set New Records
Markets finally took a breather from their eyebrow-raising rally last week, with the major indices falling despite a late-week recovery. The until now seemingly untouchable Nasdaq even dropped by 1.1% over the five sessions, as a raft of economic data gave us an insight into the damage being done by coronavirus shutdowns.
Core consumer prices took their largest monthly dip ever, at least since the records started being kept back in 1957. Core CPI slumped 0.4% as prices in apparel and transportation fell heavily. Car and truck rentals saw the biggest discounts, down 16.6%, while airline fares fell by 15.2%, and the price of men’s suits dropped by 11.3%. It’s a great time to go shopping for business attire gents!
Food prices were the exception, jumping 2.6% as US consumers made runs on the “eat at home” essentials. The cost of cereals and bakery products rose by 2.9%, in what was the biggest increase ever seen in the category. That explains the baking your own bread phase I’ve seen plastered over social media lately. Meat, fish, and poultry also drove up prices, while eggs and fruits and vegetables also increased.
Grocery Outlet Holding Corp (GO) took advantage of the lockdown in late Q1 with revenue jumping by 25% across its 350 stores, according to its earnings report during the week. The grocery chain is known for its cheap prices, and an increase in food costs has brought on an increase in the number of customers looking for cheaper alternatives. It will be interesting to see if they can develop first-time shoppers into loyal long term customers going forward. The company has only been publicly traded since June of last year but may be one to watch as the pandemic continues. GO jumped 7% after its results were released.
The overall fall in CPI was matched by April’s retail figures which dropped 16.4%. It was more than double the next worst result in the history of the index, which happened to be the previous month. In fact, March was also double it’s previous worst result, which occurred during the GFC. Sales of clothing and accessories dropped a staggering 78.8%. I suppose you don’t need new clothes if you’re hardly leaving home.
All of the major categories saw a decline except for one, that being non-store retailers. This segment includes e-retailers such as Amazon (AMZN), Alibaba (BABA) and eBay (EBAY). Sales for online-only stores gained 8.4% for the month. Stocks such as these, and the aforementioned Grocery Outlet Corp, are ones that are benefitting from the current downturn. There will always be these types of stocks in any stock market drama – be it through luck or good management.
Matthew’s developed a portfolio of such stocks that are doing well in the current environment. It’s called the Pandemic Portfolio and you can find it on our blog (which is on our website). You can read the latest update here: https://capital19.com/investing-in-us-stocks/the-pandemic-portfolio-update-2/. Our latest stock report is also one you’ll find in the portfolio, Callaway Golf (ELY). You can read about it here: https://capital19.com/investing-in-us-stocks/callaway-golf-ely/
The week ahead will see a close watch on the number of coronavirus cases. Last week saw a spike off of the previous week’s lows. No doubt due to states such as Texas beginning to reopen non-essential services. On Saturday the Lone Star State recorded its largest one-day increase in cases, as did cases in other states who in the midst of relaxing restrictions, Alabama and North Dakota. A further trend higher this week may spook constituents in such states from going outdoors, and likely delay the relaxation of laws in other regions. It’s exactly what medical authorities had predicted so there’s no real surprise here, but the economy and therefore the market won’t like it regardless.
Head of the Fed, Jerome Powell, will appear before the senate banking committee during the week, along with Treasury Secretary Steven Mnuchin. Last night on 60 minutes JPo said that the Fed still has some ammo to spend in the event the economic situation worsens. Just this week the Fed started buying corporate bonds and ETF’s. The primary and secondary Market Corporate Credit Facilities aim to buy so-called fallen angel bonds and ETF’s, those that have fallen from investment grade to speculative or junk due to the coronavirus.
The earnings will have a retail bent to it this week. Alibaba, Walmart (WMT), Baidu (BIDU), Home Depot (HD), Lowes (LOW), Best Buy (BBY), Foot Locker (FL) and Target (TGT) will all report their first-quarter numbers. Other companies of note to report include Nvidia (NVDA) which hit all-time highs during the week, and Take-Two Interactive (TTWO). We did stock reports on both of these companies in March. You can read the reports here: https://capital19.com/investing-in-us-stocks/buy-nvidia-nvda/ and https://capital19.com/investing-in-us-stocks/take-two-interactive-ttwo/
Elsewhere carmakers Ford (F), General Motors (GM), and Tesla (TSLA) will attempt to re-open their manufacturing plants. While the US-China trade war will continue as Trump ramps up his anti-China rhetoric to deflect from his own shortcomings during the coronavirus. The cost of crude oil will also come back into focus. Prices jumped last week, however, the June contract expires on Tuesday and markets will be hoping we don’t see a repeat of last month’s negative prices. Production has been falling as US oil companies cut the number of operating oil and gas rigs, and this may just save it this time around.
Whatever happens, it will be an interesting one. Strap yourselves in and keep safe everybody.