Inflation and Ukraine Threaten Stocks – ALPHA PROFIT

This is article is extracted from ALPHA PROFIT and was republished with consent. It was written by Sam Subramanian.

The surge in the consumer price index to a 40 year high rattled investors last week. Stock prices fell as the yield on the 10-year Treasury note topped 2%. The sell-off in stock prices worsened after the White House warned on the possibility of Russia invading Ukraine soon.

Stocks climbed gradually in the early part of the week from range-bound bond yields, robust earnings reports, and French President Macron’s positive comments about his meeting with Russian President Putin.

The calm ended when the U. S. Labor Department said the consumer price index (CPI) surged 7.5% during the 12 months ending in January. The annual rise in consumer prices topped economists’ 7.3% estimate, marking the highest annual increase in inflation in 40 years.

St. Louis Federal Reserve President Bullard surprised markets after the CPI data came out. He called for short-term benchmark interest rates to be 1% higher by July.

Weighed by rising inflation, the University of Michigan’s preliminary reading of consumer sentiment fell to 61.7 in February, the lowest reading since October of 2011.

Bonds sold off, pressuring stocks. The 10-year Treasury note yield climbed above the 2% mark, rising to a high of 2.06% on Friday.

Deeping the sell-off on Friday afternoon, the U. S. National Security Advisor Sullivan told a White House briefing that Russia could invade Ukraine during the Winter Olympics. The U. S. and U. K. advised their citizens to leave Ukraine as soon as possible.

For the week ending February 11, the S&P 500 (SPY) fell 1.8%. The benchmark closed below the psychologically important 200-day moving average. Eight of the 11 sectors declined.

Market breadth was negative. The number of advancing stocks in the S&P 500 lagged the number of decliners by a 3-to-4 ratio.

Energy (XLE), materials (XLB), and financials (XLF) led the S&P 500, ending above the flatline.

Information technology (XLK), real estate, and communication services (XLC) lagged the S&P 500, losing 2.6% or more.

The S&P 500’s top 10 winners included the following:

1. Consumer Discretionary

Newell Brands (NWL) +14% – The diversified consumer products company beat analysts’ fourth-quarter sales and EPS forecasts by 6% and 30%, respectively, to be the week’s top performer in the S&P 500.

Royal Caribbean (RCL) +11% and Carnival Corp. (CCL) +10% – Cruise operators rose after competitor Norwegian Cruise Line Holdings (NCLH) provided positive comments on booking volumes & pricing. Norwegian ended the requirement for all passengers to wear masks onboard its ships.

Penn National Gaming (PENN) +8% – The casino operator rose after competitor MGM Resorts International (MGM) gave an upbeat assessment of the recovery in gambling activity in Las Vegas.

2. Materials

Freeport-McMoRan (FCX) +11% – The U. S.-based copper producer rose on reports of copper inventories nearing ultra-low levels.

3. Consumer Staples

Tyson Foods (TSN) +11% – The meat producer reported a 24% increase in quarterly sales to $12.9 billion and a 48% increase in EPS to $2.87 after passing price increases for its products to customers. Tyson forecasts fiscal 2022 sales to grow 8% to $51 billion.

Other Top 10 Winners

The S&P 500’s top 10 winners for the week also included:

• Air carrier United Airlines (UAL) +10%
• Energy services & technologies company Baker Hughes (BKR) +10%
• Marketing & corporate communications company Omnicom Group (OMC) +11%
• Memory chipmaker Micron Technology (MU) +11%

Top ETFs for the week

The following ETFs themes worked well: metals including silver and gold, volatility, and cannabis. The top ETFs for the week include:

• ETFMG Prime Junior Silver Miners ETF (SILJ) +10.9%
• iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) +10.7%
• AdvisorShares Pure US Cannabis ETF (MSOS) +9.5%
• SPDR S&P Metals and Mining ETF (XME) +9.4%
• VanEck Junior Gold Miners ETF (GDXJ) +8.5%

Top Fidelity Fund for the week

Fidelity Select Gold (FSAGX) +6.3%

Looking ahead to the week of February 14

Debates over interest rates are likely to influence markets this week as investors seek clarity from Federal Reserve officials on the course of interest rates this year. Investors will get additional input on inflation. Rising worries of Russia invading Ukraine may continue to impact investor sentiment. Few high-profile earnings reports are in store as well.

* Investors are looking for clear communication from the Federal Reserve. Comments from St. Louis Fed Bank President Bullard about aggressive rate hikes rattled investor sentiment last week. Other Fed officials pushed back on Bullard’s reaction. This week brings the Fed’s current thinking into focus with Bullard and five more Fed officials, including New York Fed President Williams and Fed Governor Brainard, speaking at different forums.

* The Federal Reserve also releases minutes from its January 26-27 FOMC meeting on Wednesday. Investors will look to the minutes for insights on the Fed’s inflation outlook and plans to increase interest rates and shrink its balance sheet.

* Investors eagerly await data on inflation in wholesale prices. According to Briefing.com, economists expect the producer price index (PPI) to increase 0.5% in January compared to 0.2% in December. Stocks can see a relief rally if the PPI increases less than expected. Investors will also scrutinize data on January retail sales as rampant inflation caused consumer sentiment to fall last week.

* The U. S. estimates Russia has amassed more than 100,000 troops near Ukraine’s borders. Russia has created pressure points on three sides of Ukraine — Crimea to the south, Belarus to the north, and the Russian side of the Russia-Ukraine border. Investors will be alert to news on Russian troop movements to assess the situation.

* AIG, Cisco, Deere, Nvidia, and Walmart report earnings this week.

You can find the previous ALPHA PROFIT contribution here