Nowhere is safe anymore

05/19/2022 | 10:35am

The weak results from Walmart and Target highlighted the difficulties that many businesses and consumers are facing due to rampant inflation.

Wall Street opened in the red again today, due not only to inflation concerns, but also because of a slightly worse-than-expected job reading.

New claims for U.S. unemployment benefits increased by 21,000 to 218,000 for the week ended May 14. This is slightly higher than the 200,000 applications forecast in a Reuters poll. This is the highest level since January, the Labor Department said.

This comes after yesterday session, which was the worst day for US stocks since the pandemic flash crash of March 2020. A drop that deserves some explanation.

Eight increases vs 492 drops. This is the closing balance of the S&P 500 yesterday. It lost 4%, let down by its usual shock absorbers, Apple, Microsoft and others. For a few weeks now, large US tech companies have lost their mojo.

Yesterday, a whole sector in the US went down, and not just any sector: consumer staples. Since the start of the year, investors have increased their bets on defensive stocks. Among them, food retailing companies have been getting good press, so much so that a good number of them have had positive stock market performances. Why do we go to defensives in more uncertain times? Because they market products or services that we cannot really do without. The traditional quartet is Telecom, Pharmacy, Utilities and Consumer staples.

The warning shot came from Walmart on Tuesday. The group's share price collapsed by 11% after a downward revision of its annual objectives on the sidelines of the announcement of its last quarter results. So Walmart was not the haven that investors were hoping for, because inflation made its costs swell: transportation, labor, products. In the wake of this, rival Target was saying the same thing yesterday. Same cause, even heavier consequences: -25% at the close. Other companies in the sector such as Dollar Tree, Dollar General or Costco Wholesale also saw their stocks sink. All of these stocks had been outperforming the market quite significantly since January 1.

Investors are now wondering where is safe to invest in equities. Are there really such havens when the great inflationary machine reshuffles the deck? The answer is yes, since we know that commodities follow the slope of prices. Assets linked to oil and agricultural commodities are at or near their peak. But that's not very exciting.

But what about the others? In 2020, when the coronavirus caused panic across markets, it took a while for investors to realize that the big digital players also had defensive virtues: they have penetrated our daily lives to such an extent that some of them are almost basic services that would probably be among the last budgets to be cut. But for the time being, in the spring of 2022, apart from commodities, investors have not really found their sanctuary, especially since they can no longer rely on the largesse of central banks. It is all getting very complicated indeed.

 

Economic highlights of the day:

On the agenda today, we have the Philly Fed index and weekly jobless claims, leading indicators and monthly housing figures.

The dollar is down 0.9% to EUR 0.9464. The ounce of gold rose to USD 1843. Oil is down, with North Sea Brent crude at USD 108.13 per barrel and US light crude WTI at USD 107.89. The yield on 10-year U.S. debt is falling to 2.91%. Bitcoin is trading around USD 29,500.

 

On markets:

* Kohl's, which is seeking a buyer under pressure from activist investors, lowered its annual profit target due to the heavier-than-expected impact of rising transportation and labor costs. It lost more than 1% in premarket trading after falling about 11% for the week, as warnings from Walmart and Target heightened concerns about the impact of inflation on the retail groups.

* Cisco lowered its revenue growth forecast for 2022 after the adverse impact of health restrictions in China and the war in Ukraine on its quarterly revenue came in below market expectations. In pre-market trading, the stock fell by 12.5%.

* Spirit Airlines - The airline's board of directors urged its shareholders to reject the unsolicited offer from JetBlue Airways

* The Boeing Company - Britain's IAG announced Thursday that it has agreed to order 50 737 MAX aircraft from Boeing, to be delivered between 2023 and 2027.

* Under Armour announced Wednesday the resignation of its chief executive Patrik Frisk, who will be temporarily replaced by Colin Browne, currently chief operating officer.

* Ford on Thursday announced a recall of 39,000 2021 Expedition and Lincoln Navigator SUVs, with the automaker warning of an engine compartment fire hazard.

 

Analyst recommendations:

  • Barclays: KBW upgrades from market perform to outperform with a target of GBp 230.
  • Cisco Systems: KGI Securities upgrades to outperform from neutral. PT rises 16% to $56.
  • Crowdstrike: Morgan Stanley lowers price target to $181 from $212, maintains equalweight rating.
  • Future: Berenberg keeps Buy rating with a reduced target from GBp 5225 to GBp 3600.
  • Imperial Brands: Jefferies remains a Hold with a price target raised from GBp 1,668 to GBp 1,899.
  • Keysight Technologies: Jefferies & Co adjusts price target to $175 from $195, maintains buy rating.
  • Lowe's: Truist Securities lowers price target to $237 from $283. Maintains buy rating.
  • Peloton Interactive: UBS adjusts peloton interactive price target to $13 from $30, maintains sell rating.
  • Salesforce.com: Roth Capital upgrades to buy from neutral, keeps $242 price target.
  • Target: Stifel downgrades to hold from buy. PT down 14% to $185.
  • The British Land : AlphaValue stays Sell with a target raised from GBp 394 to GBp 419.
  • The Home Depot: Piper Sandler raises price target to $321 from $310, maintains neutral rating.
  • Under Armour: Morgan Stanley downgrades to equal-weight from overweight. PT set to $11, implies a 4.5% increase from last price.
  • Walmart: UBS adjusts price target to $165 from $180, maintains buy rating.
  • Watches of Switzerland: Jefferies keeps Buy rating with a price target reduced from GBp 1600 to GBp 1500.
  • Welltower: Credit Suisse upgrades to outperform from neutral, lifts price target to $100 from $92.
  • Zoom Video Communications: UBS adjusts  price target to $100 from $130, maintains neutral rating.
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