Key Takeaways

Investors Gear Up for Earnings Season, But Inflation Throws a Wrench 

Transportation Stocks Hit Potholes After Analyst Downgrades

Food and Beverage Stocks are Pushing Consumer Staples Higher as Food Shortages Lead to Unrest

Shawn Cruz, Director of Derivative Strategy, TD Ameritrade

(Monday Market Open) Equity index futures are pointing to a lower open ahead of earnings season this Wednesday, when JPMorgan (JPM), BlackRock (BLK), and Delta Air Lines (DAL) report. However, investors have plenty to deal with this morning as lockdowns spread in China and yields continue to climb.

Potential Market Movers

The 10-year Treasury yield (TNX) has risen to 2.75% in premarket trading ahead of Tuesday’s Consumer Price Index (CPI). The 10-year yield is now back to March 2019 levels. February CPI showed inflation growing at 7.9%; March CPI is projected to come in at 8.5% with the Russian-Ukrainian war adding to already high levels of inflation.

Gold futures were up 1.14% in premarket trading, indicating investors are buying as a hedge against inflation. Gold was trading just above its $1,965 resistance level and could target its March highs that were set when oil prices were testing $130.

More inflation pressures could come from higher natural gas prices with natural gas futures also climbing 2.5% in premarket trading. The European Union (EU) is in talks with OPEC, hoping to persuade members to increase output for oil and gas to make up for the current sanctions on Russia.

Russia appears to be looking for a new approach in its invasion of Ukraine by appointing a new military commander. According to the Washington Post, General Aleksandr Dvornikov is known for Russia’s brutal campaign in Syria of widespread and indiscriminate bombing to put down Syrian insurgents. Russian forces appear to be bogged down as Ukrainian forces are having success in defending their country.

The EU’s move to go around Russia to influence OPEC may be pushing oil prices lower, but the bigger impact on oil prices is coming from China. China continues to increase lockdowns because 26,000 new COVID-19 cases were recorded in Shanghai on Sunday. The lockdowns are threatening demand for oil and pushing oil futures 4.72% lower at $93.62 per barrel.  

Moving from the macro level to the micro level, Twitter (TWTR) announced that Elon Musk would not be joining Twitter’s board of directors. It appears that Musk decided against the board position because it would be harder for him to be publicly outspoken on what he sees as Twitter’s censorship of free speech. TWTR was down 2.25% before the opening bell.

AT&T (T) was up 3.5% in premarket trading after completing its spinoff of WarnerMedia. Warner Bros Discovery will debut today under the symbol (WBD). The spinoff prompted JPMorgan (JPM) analyst Philip Cusick to upgrade AT&T to overweight.

Finally, Shopify (SHOP) announced a 10-for-1 stock split prompting a 1.63% rally in pre-market trading.  

One last note. Investors have a shortened week of trading because markets are closed Friday for the Good Friday Holiday.

Reviewing the Market Minutes

Stocks were mixed on Friday with the Dow Jones Industrial Average ($DJI) rising 0.40%, the S&P 500 (SPX) sliding 0.27%, and the Nasdaq Composite ($COMP) falling 1.34%. The Dow was also the top index for the week, eking out a gain of 0.22%. However, the S&P 500 was down 1.12%, and the Nasdaq dropped 4.19%. All three indexes are lower on the year with the Dow down the least at 5.09%, the S&P 500 losing 6.43%, and the Nasdaq falling 13.4% year to date.

The Nasdaq continues to struggle as yields rise because it of its high weighting in growth stocks. Higher yields prompt revaluations of companies, which tend to favor value stocks over growth stocks. The 10-year Treasury yield (TNX) jumped 13.37% this week, moving up from 2.38% to 2.71%.

Energy was the top sector on Friday with the Energy Select Sector Index rallying 2.78%. It was followed by the Financial Select Sector Index, which rose 1.01%, and the Health Care Select Sector Index, which increased 0.58%. However, the week belonged to the technology, utilities, and consumer staples sectors. With that said, energy is still the biggest winner this year with the energy index returning 38.94% year to date. Utilities take the second spot at 8.51%, and technology just edged out consumer staples at 2.26% and 1.9% respectively.

Transportation stocks continued to struggle on Friday after analysts from BofA Securities downgraded Union Pacific (UNP) and UPS (UPS). The action caused the stocks to trade lower on the day, which pushed the Dow Jones Transportation Average ($DJT) down near its February lows.

Investors continue their flight to quality by favoring large blue-chip stocks. UnitedHealth (UNH), Walmart (WMT), and Coca-Cola (KO) set new all-time highs on Friday. UNH will be one of the first companies out of the gate this week when it reports earnings next Thursday. 

CHART OF THE DAY: FOOD FIGHT. The Consumer Staples Select Sector Index ($IXR—candlesticks) had underperformed the S&P 500 (SPX—blue) most of the year until its recent push. The stocks in the S&P Food & Beverage Select Industry Index ($SPSIFB—pink) have likely helped the staples sector latest surge. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

American Cuisine: The Consumer Staples Select Sector Index and the S&P Food & Beverage Select Industry Index have both risen nearly 11% from their March lows. Many food and beverage companies have been able to pass on their rising costs to consumers, which has helped them maintain their bottom lines. Additionally, current inventories that were processed and packaged at lower prices are likely being sold with higher margins.

However, some of these gains may be short-lived because companies don’t like the costs of holding inventories, which is why they use “just-in-time” (JIT) logistic strategies that are meant to get products from the processing plants to the shelves as soon as possible. However, pandemic-related supply chain issues have exposed problems with the JIT system.

One way to get around this issue would be to focus on companies that process most of their items in the United States and may find it easier to still get products to shelves. According to Food Processing magazine, the top companies for 2021 in North America based on their sales of value-added, consumer-ready goods that were processed in the United States and Canada were PepsiCo (PEP), Tyson (TSN), Nestle U.S. & Canada, JBS USA, and Kraft Heinz (KHC).

Staff of Life: On Friday, the Food and Agriculture Organization (FAO) of the United Nations updated its monthly FAO Food Price Index (FFPI) revealing a “giant leap” in global food prices, which pushed the index to a new all-time high. The leap was propelled by other all-time highs in vegetable oils, cereals, and meats as well as large increases in sugar and dairy products.

Of course, the Russian war on Ukraine was a large driver for the increase in wheat and other coarse grains, but there’s also concern over crop conditions in the United States with adverse weather and drought. The Russian-Ukraine war also disrupted the production and transportation of vegetable oils like palm, soy, and rapeseed. However, South America is struggling to get its oils to market too. Similar themes can be seen in other food groups in the report.

Anytime you’re dealing with the price of a good or service, there’s a demand and a supply side to consider. Demand is often driven by the cost of money. The Fed’s low interest rates and the U.S. and other governments issuing stimulus checks increased demand. Lockdowns and other pandemic-related restrictions reduced supply by halting or slowing down production and logistics. And, of course, the Russian attack on Ukraine is causing additional supply problems. Sadly, the last two years have been a “perfect storm” of inflation.

Hangry: Rising food prices obviously hits poorer people the hardest and historically has led to uprisings. In 2011, skyrocketing food costs contributed to the Arab Spring where political uprising in Egypt and Libya led to the toppling of the Mubarak and Gaddafi governments.

Currently, there are protests over food prices in Sri Lanka and Peru. According to Fortune, protests in China over ongoing COVID-19 lockdowns also have an undercurrent of frustration over food shortage, which has led to bartering among Shanghai citizens.

While the United States is very fortunate to have access to numerous types of food, Forbes is reporting that many U.S. store shelves sit empty as food production slows or as companies continue to struggle with clogs in the supply chain.

Notable Calendar Items

April 12: Consumer Price Index (CPI), Albertsons (ACI) earnings, CarMax (KMX) earnings

April 13: Producer Price Index (PPI), Transportation Services Index, JPMorgan (JPM) earnings, BlackRock (BLK) earnings, Delta Air Lines (DAL) earnings

April 14: Retail Sales, UnitedHealth (UNH), Wells Fargo (WFC), Morgan Stanley (MS), Goldman Sachs (GS), Citigroup (C) earnings

April 15: Markets closed for Good Friday

Good Trading,

Shawn Cruz

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