Market Snapshot
briefing.com
| Dow | 37466.11 | +25.77 | (0.07%) | | Nasdaq | 14524.07 | +13.77 | (0.09%) | | SP 500 | 4697.24 | +8.56 | (0.18%) | | 10-yr Note | -26/32 | 4.04 |
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| | NYSE | Adv 1452 | Dec 1282 | Vol 971 mln | | Nasdaq | Adv 1811 | Dec 2402 | Vol 5.2 bln |
Industry Watch
| Strong: Financials, Consumer Discretionary, Communication Services, Information Technology, Energy |
| | Weak: Consumer Staples, Real Estate, Health Care |
Moving the Market
-- Digesting the Employment Situation Report for December, which was not weak; good for economic outlook and earnings prospects, but doesn't bode well for Fed rate cuts
-- Treasury yields moving higher again; 10-yr yield back above 4.00%
-- Some mega caps trading down, weighing on index performance
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Closing Summary
05-Jan-24 16:30 ET
Dow +25.77 at 37466.11, Nasdaq +13.77 at 14524.07, S&P +8.56 at 4697.24
[BRIEFING.COM] Stocks and bonds had a somewhat choppy session. The S&P 500 closed just below 4,700 with a 0.2% gain. The Nasdaq Composite and Dow Jones Industrial Average each logged a 0.1% gain while the Russell 2000 declined 0.3%.
Market participants were digesting the December Employment Situation Report and the December ISM Services PMI. The former featured better than expected nonfarm payrolls, average hourly earnings, and a steady unemployment rate versus expectations for an increase. The latter showed a larger than expected deceleration in December service sector growth. Together, those reports stirred uncertainty about rate-cut expectations.
The solid employment numbers may keep the Fed from cutting rates as much as the market had expected, whereas the soft reading for business activity in the nation's largest sector would perhaps keep the Fed aligned with the market's rate-cut expectations.
The 10-yr yield shot to 4.09% after the jobs report, but moved as low as 3.95% following the PMI number. It settled the day at 4.04%, which is five basis points higher than yesterday. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, settled the session at 4.39% after dipping to 4.32% earlier.
A late afternoon rollover in (AAPL 181.18, -0.73, -0.4%) shares weighed down the major indices following news that the DOJ is getting close to filing an antitrust case against Apple, according to The New York Times. The Vanguard Mega Cap Growth ETF (MGK) still eked out a 0.1% gain.
Only three S&P 500 sectors closed with declines -- consumer staples (-0.2%), real estate (-0.2%), and health care (-0.02%) -- while the financials sector (+0.5%) saw the biggest gain. None of the sectors moved more than 0.5% in either direction.
- Dow Jones Industrial Average: -0.6%
- S&P 500: -1.5%
- S&P Midcap 400: -2.5%
- Nasdaq Composite: -3.3%
- Russell 2000: -3.8%
Reviewing today's economic data:
- December Nonfarm Payrolls 216K (Briefing.com consensus 162K); Prior was revised to 173K from 199K; December Nonfarm Private Payrolls 164K (Briefing.com consensus 132K); Prior was revised to 136K from 150K;
- December Unemployment Rate 3.7% (Briefing.com consensus 3.8%); Prior 3.7%; December Avg. Hourly Earnings 0.4% (Briefing.com consensus 0.3%); Prior 0.4%; December Average Workweek 34.3 (Briefing.com consensus 34.4); Prior 34.4
- The key takeaway from the report is that it wasn't weak, so the market is going to have to grapple with the notion that the Fed may not cut rates as many times in 2024 as the market had come to expect at the end of 2023.
- November Factory Orders 2.6% (Briefing.com consensus 1.3%); Prior was revised to -3.4% from -3.6%
- The key takeaway from the report is that factory order strength was muted in November excluding transportation.
- December ISM Non-Manufacturing PMI 50.6% (Briefing.com consensus 52.5%); Prior 52.7%
- The key takeaway from the report is that the largest sector of the U.S. economy saw a slowdown in activity in December to a level that was just above contraction -- a directional move that should at least keep the Fed from raising rates again if it doesn't elect to cut rates as soon as the market expects.
Monday's economic calendar is limited to the November Consumer Credit report at 15:00 ET.
Stocks sit near lows; Treasury yields climb on the week
05-Jan-24 15:40 ET
Dow -38.02 at 37402.32, Nasdaq -18.90 at 14491.40, S&P -2.66 at 4686.02
[BRIEFING.COM] The S&P 500 and Nasdaq Composite trade off session lows heading into the close.
Richmond Fed President Barkin (voting FOMC member) said that the Fed should lower rates as the economy normalizes, according to Bloomberg.
The 2-yr note yield declined three basis points today, but climbed 14 basis points this week, to 4.39%. The 10-yr note yield climbed another five basis points today, which its weekly move higher5 to 16 basis points, to 4.04%.
Monday's economic calendar is limited to the November Consumer Credit report at 15:00 ET.
Stocks turn lower with one hour left of trading
05-Jan-24 15:00 ET
Dow -47.30 at 37393.04, Nasdaq -15.05 at 14495.25, S&P -2.20 at 4686.48
[BRIEFING.COM] Stocks have turned lower again with one hour left in the session.
Some mega cap stocks hit fresh session lows recently. Apple (AAPL 180.66, -1.26, -0.7%) is a standout in that respect after selling increased in response to news that the DOJ is getting close to filing an antitrust case against Apple, according to The New York Times.
Elsewhere, WTI crude oil futures jumped 2.2% to $73.73/bbl and natural gas futures rose 2.0% today to $2.62/mmbtu.
MSCI falls among S&P 500 stocks after RayJay downgrade
05-Jan-24 14:30 ET
Dow +44.20 at 37484.54, Nasdaq +36.45 at 14546.75, S&P +11.39 at 4700.07
[BRIEFING.COM] The S&P 500 (+0.24%) is narrowly in second place behind the Nasdaq Composite (+0.25%).
Elsewhere, S&P 500 constituents Catalent (CTLT 45.54, +2.09, +4.81%), Southwest Airlines (LUV 29.09, +1.16, +4.15%), and Viatris (VTRS 12.03, +0.48, +4.15%) pepper the top of today's standings despite a dearth of corporate news.
Meanwhile, MSCI (MSCI 543.37, -16.35, -2.92%) is today's top laggard after catching a downgrade to Mkt Perform at Raymond James.
Gold a hair lower on Friday, down on the week
05-Jan-24 14:00 ET
Dow +48.98 at 37489.32, Nasdaq +47.04 at 14557.34, S&P +13.73 at 4702.41
[BRIEFING.COM] With about two hours to go in the opening week of 2024 the tech-heavy Nasdaq Composite (+0.32%), along with its counterparts, have consolidated their modest move to the upside from the prior half hour.
Gold futures settled $0.20 lower (flat) to $2,049.80/oz, down about -1.1% this week as gains in the dollar and treasury yields applied pressure.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $102.34.
Page One
Last Updated: 05-Jan-24 08:59 ET | Archive
December employment data introduces complicated rate-cut equation
The market's nine-week win streak is at risk of coming to an end this week. There has been plenty of deliberation as to why that is, but the simplest explanation is that the market had a nine-week win streak, leaving it overextended on a short-term basis and due for a pullback.
Fittingly, many of last year's biggest gainers, as well as many of the biggest gainers during the nine-week win streak, have been among the biggest losers to start 2024. To wit: the Philadelphia Semiconductor Index is down 6.4%, the Invesco S&P 500 High Beta ETF (SPHB) is down 4.6%, the S&P 500 information technology sector is down 4.2%, the Nasdaq Composite is down 3.3%, the Russell 2000 is down 3.4%, and the Vanguard Mega-Cap Growth ETF (MGK) is down 3.1%.
We didn't mention bonds, but they're not doing too swell either to begin 2024 following a huge rally to end 2023. Shortly before the release of the December Employment Situation Report, the 2-yr note yield was up 15 basis points in 2024 to 4.40% and the 10-yr note yield was up 15 basis points to 4.03%.
Following the release of the December Employment Situation Report, bond yields backed up even further and the equity futures sunk even lower. Why? Because there was some otherwise good news in the employment situation.
Nonfarm payrolls increased by a larger-than-expected 216,000; however, downward revisions for October and November led to 71,000 fewer jobs than previously reported. Still, the unemployment rate held steady in December at a remarkably low 3.7% and average hourly earnings growth ticked up to 4.1% year-over-year from 4.0% in November.
The key takeaway from the report is that it wasn't weak, so the market is going to have to grapple with the notion that the Fed may not cut rates as many times in 2024 as the market had come to expect at the end of 2023.
Notable headlines from the December Employment Situation Report:
- December nonfarm payrolls increased by 216,000 (Briefing.com consensus 162,000). The 3-month average for total nonfarm payrolls decreased to 165,000 from 180,000. November nonfarm payrolls revised to 173,000 from 199,000. October nonfarm payrolls revised to 105,000 from 150,000.
- December private sector payrolls increased by 164,000 (Briefing.com consensus 132,000). November private sector payrolls revised to 136,000 from 150,000. October private sector payrolls revised to 44,000 from 85,000.
- December unemployment rate was 3.7% (Briefing.com consensus 3.8%), versus 3.7% in November. Persons unemployed for 27 weeks or more accounted for 19.7% of the unemployed versus 19.4% in November. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.1% versus 7.0% in November.
- December average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus 0.4% in November. Over the last 12 months, average hourly earnings have risen 4.1%%, versus 4.0% for the 12 months ending in November.
- The average workweek in December was 34.3 hours (Briefing.com consensus 34.4), versus 34.4 hours in November. Manufacturing workweek was little changed at 39.8 hours. Factory overtime was unchanged at 2.9 hours.
- The labor force participation rate fell to 62.5% from 62.8% in November.
- The employment-population ratio dropped to 60.1% from 60.4% in November.
The 2-yr note yield climbed as high as 4.47% in the wake of the report and is now at 4.45%. The 10-yr note yield hit 4.09% and is now at 4.06%.
Currently, the S&P 500 futures are down 11 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 45 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 79 points and are trading 0.2% below fair value.
The stock market and Treasury market, therefore, are on lower tracks in early trading, still contending with simple profit-taking efforts, but now also dealing with a more complicated rate-cut equation.
-- Patrick J. O'Hare, Briefing.com
CVS Health's rebound continues as Medicare Advantage membership growth accelerates (CVS)
CVS Health's (CVS) comeback is continuing today after the company reaffirmed its FY23 and FY24 EPS guidance while also announcing that Tom Cowhey, who had been serving as interim CFO since October, will take the head finance role on a permanent basis. Mr. Cowhey joined CVS in February 2022 after previously serving as CFO of Surgery Partners (SGRY) and takes over for Shawn Guertin, who has been on a leave of absence due to family health reasons.
- Last year was rough for CVS as rising medical benefit costs weighed on its Health Care Benefits segment, while its Pharmacy & Consumer Wellness segment experienced slower growth as sales of COVID-19 test kits and other COVID-related products dropped off. However, the stock ended 2023 on a strong note, rallying by 16% in December and today's developments should help keep that upward momentum going.
- On December 5, CVS reaffirmed its FY23 EPS and revenue guidance of $8.50-$8.70 and $351.5-$357.3 bln, respectively. In this morning's filing, though, the company said it now expects FY23 EPS to be in the upper half of that $8.50-$8.70 range. For FY24, CVS maintained its outlook for EPS of at least $8.50 and cash flow from operations of at least $12.5 bln.
- The underlying driver for the positive outlook is what's most encouraging. Specifically, CVS disclosed that it expects total Medicare Advantage membership to grow by at least 800,000 in 2024, up from its prior forecast of 600,000 new members.
- To understand the full importance of this, we need to rewind to last May when CVS reported that its 2024 operating income could drop by $800 mln to $1.0 bln due to lower plan star ratings in its Medicare Advantage (MA) program. At that time, only 21% of its MA members were in plans with a star rating of at least four, down from 87% at the end of 2021, which means that far fewer members were eligible to receive bonus payments from the Centers for Medicare & Medicaid Services.
- Fast forward to this October, and CVS disclosed that 87% of its Aetna Medicare Advantage members will be enrolled in contracts rated at four stars or higher. Consequently, the company is gaining new members from competitors such as United Health (UNH) and Humana (HUM). In this morning's filing, CVS stated that it's experiencing a "higher than historical proportion of new sales coming from competitor MA plans."
The main takeaway is that while a rising medical benefit ratio will likely continue to be an earnings headwind as outpatient procedures increase, CVS's improved star rating will help to offset that as MA membership grows.
Netflix mulling monetization of its gaming portfolio; could drive significant upside (NFLX)
Netflix (NFLX) has not been in the mobile gaming space for a long time, launching its first round of games in November 2021. While its experience may be limited compared to established giants like Electronic Arts (EA) and Take-Two (TTWO), Netflix has not looked at its mobile gaming business as some side project.
The company has added several game development studios since late 2021, fortifying its gaming arsenal from an initial five games to over 80. While many titles Netflix offers its streaming subscribers are through licensing partnerships, such as several Grand Theft Auto releases (owned by TTWO), the respectable number of games highlights Netflix's seriousness in becoming an established player in the mobile gaming space. Currently, all its games can be played for free for Netflix subscribers, with nothing behind paywalls or in-app purchases.
However, Netflix is now looking to extract additional revenue from its gaming portfolio. According to WSJ, Netflix is contemplating implementing in-app purchases, possibly charging subscribers an additional fee to buy a Netflix-backed title, or host ads in games for subscribers of its recently-launched ad-tier offering.
- Netflix is coming off a fantastic quarter, underscored by an impressive +8.76 mln global streaming paid net adds, reflecting success in cracking down on password sharing. By proving skeptics who saw a password-sharing crackdown leading to a sharp decline in paid users wrong, Netflix showcased its competitive advantage through attractive IP and other content on its platform.
- Gaming could enjoy similar stickiness. Netflix already enticed users to its gaming portfolio by allowing subs to play them at no additional cost. Just like a crackdown on password sharing did not drive a meaningful decline in subs, adding paywalls or ads to its games may not be met with much backlash.
- If monetizing its gaming division succeeds, Netflix is staring at massive potential. In late October, management touched on the incredible opportunity in mobile gaming, citing a roughly $140 bln market outside China and Russia.
Netflix commands an advantage in mobile gaming. Unlike EA or TTWO, Netflix is a video content-first company, building a following for a particular show and its cast of characters, e.g., Stranger Things. With a fanbase firmly established, Netflix can then leverage its IP, creating mobile games as an extension of the show and characters, adding another layer of must-experience content to its platform. We noted in early 2022 that Netflix's gaming ambition was worth watching. If the company successfully monetizes this component of its business, it could drive meaningful gains over the long run.
Costco rings up strong holiday shopping season sales (COST)
Costco (COST) rang up strong sales in December, making the membership warehouse retailer a clear winner during the holiday shopping season. Comparable sales, excluding changes in gasoline prices and FX impact, increased 8.1%, outpacing gains of 4.4% in November and 3.4% in October.
- COST was a popular shopping destination in December as customer traffic jumped by 7.5%, indicating that it continues to take market share from other retailers, including grocery store chains. On that note, food and sundries was a standout merchandise category once again, up by high-single-digits, reflecting consumers' desire to find value in buying items in bulk.
- When COST reported upside Q1 results on December 14, it was evident that the holiday shopping season was going better than many had anticipated. And it wasn't just holiday meals and pies that its customers were buying.
- After a few rough quarters, big-ticket items saw an upswing in sales, including a mid-20% increase in appliances sales. TVs, jewelry, and electronics also bounced back, helping to push Q1 eCommerce same store sales higher by 6.3%. Notably, big-ticket categories account for about 50-60% of COST's total eCommerce sales.
- That momentum carried into December as non-food categories experienced a high-single-digit increase. Jewelry, gift cards, and tires were particularly strong, helping to offset softness in toys, sporting goods, and seasonal products. Bolstered by this improvement in non-food sales, eCommerce same store sales were up an impressive 17.4%, although COST did lap a favorable yr/yr comparison of -5.4%.
The main takeaway is that COST emerged as a holiday shopping season winner, as reflected in the stock's 15% gain since mid-November. Following the company's upside Q1 earnings report, the solid December sales results doesn't come as a huge surprise. Looking ahead, the next meaningful catalyst could come in the form of an overdue membership increase -- something that COST CFO Richard Galanti has said is a matter of when, not if.
Constellation Brands receives a toast over resilient demand across its Beer business in Q3 (STZ)
Beer, wine, and spirits producer Constellation Brands (STZ +3%) may have missed Q3 (Nov) revenue estimates and slashed its FY24 (Feb) Wine and Spirits organic sales outlook. However, bubbling enthusiasm over the continued strength in the company's Beer segment keeps shares relatively afloat today. Sustained resilience in Beer, which comprises 80% of total revenue, not only offset weak Wine and Spirits performance but also paved the way for a double-digit adjusted earnings beat in Q3 and kept STZ's FY24 adjusted EPS outlook intact.
- Total sales inched 1.4% higher yr/yr to $2.47 bln in the quarter, entirely driven by a 4.0% improvement in the net sales of STZ's Mexican beer brands, including Modelo, Corona, and Pacifico. Beer shipments and depletions were up 3.4% and 8.2% yr/yr, respectively, carrying upward momentum from the past several quarters. STZ noted that its Beer segment outpaced the total beer category and high-end segment in dollar sales and volume growth.
- Unwavering strength in STZ's Beer business provided an operating margin boost as consumers absorbed higher pricing at the same time input costs were falling, resulting in a 100 bp improvement in operating margins yr/yr to 38.5%. Wine and Spirits also posted a modest bump in operating margins, growing the figure by 60 bps to 25.4%, primarily due to deflation across STZ's supply chain. As a result, STZ topped bottom-line estimates by a decent margin, its fourth straight earnings beat.
- However, Wine and Spirits' demand woes persisted in Q3. Nearly three years ago, STZ let go of its lower-priced wines, hunkering down on its premium portfolio to bolster margins and reenergize sales. This strategy continued to experience growing pains in Q3, illuminated by a 7.0% organic net sales decline on an 11.6% and 10.0% drop in shipments and depletions, respectively.
- It was not all doom and gloom in Wine and Spirits, however. STZ's largest fine wine brand, The Prisoner, registered 6.0% depletion growth, outpacing its respective segment of the broader wine category. Meanwhile, in craft spirits, STZ's second-largest brand, Mi CAMPO tequila, reached over 80% depletion growth.
- As we mentioned last quarter, a swift turnaround in Wine and Spirits is unlikely. STZ reduced its FY24 Wine and Spirits organic net sales forecast considerably to a 7.0-9.0% decline yr/yr compared to its previous 0.5% decline to 0.5% growth estimate. On a lighter note, STZ projected its Beer business to maintain its previous 8-9% net sales growth target in FY24. Beer also was the underlying factor behind STZ reiterating its FY24 adjusted earnings guidance of $12.00-12.20.
With STZ's Beer segment holding everything together, it is disappointing that Wine and Spirits cannot find its footing, capping potentially greater returns each quarter. STZ could not have been handed a more lucrative opportunity last year when one of its biggest competitors, Anheuser-Busch Inbev (BUD), received significant backlash over its marketing campaign. While STZ's beer brands did capitalize on its competitors' woes, its Wine and Spirits business weighed on the overall portfolio. Until STZ can kick this segment into gear, more meaningful stock growth may be limited.
RPM Inc takes a spill in Q2 as weakness in DIY and specialty OEM markets weigh on results (RPM)
RPM Inc (RPM -4%) took a spill in Q2 (Nov), missing earnings and revenue estimates for the first time in at least a year and lowering its FY24 (May) sales growth forecast. There were a few silver linings in the quarter, primarily emanating from the specialty coatings manufacturer's MAP 2025 savings initiatives. However, lingering softness across the do-it-yourself (DIY) and specialty OEM markets brushed aside any encouraging trends.
- Headline numbers were disappointing. RPM fell short of earnings expectations for the first time in six quarters. Meanwhile, flat yr/yr sales at $1.79 bln was worse than the modest positive growth analysts anticipated.
- The laggards were RPM's Consumer Group and Specialty Products Group, which both recorded negative sales growth in the quarter, falling by 5.2% to $578.69 mln and 16.6% to $176.98 mln, respectively.
- Consumer Group was pressured by weak takeaway at retailers as typical DIY customers allocated their discretionary dollars toward travel and entertainment rather than home improvement projects. Similar trends have occurred at retail giants Lowe's (LOW) and Home Depot (HD) in recent quarters. Retailers also remain cautious with their inventories, which placed outsized volume pressure on RPM.
- Specialty Products Group was clipped by soft specialty OEM demand, particularly among end markets with more exposure to residential housing.
- On the flip side, Construction Products Group and Performance Coating Group kept sales from sinking in Q2, registering 8.1% and 5.1% sales growth to $661.75 mln and $374.86 mln, respectively. Both segments benefited from a focus on repair and maintenance as well as robust demand for infrastructure reshoring and high-performance buildings.
- Meanwhile, many changes RPM has made regarding its management structure and MAP 2025 initiatives yielded healthy gains. For example, increased collaboration among sales teams in Africa, the Middle East, and Asia Pacific led to growth of 13% in Africa and the Middle East and over 6% in Asia Pacific. Additionally, MAP 2025 benefits resulted in double-digit adjusted EBIT growth and reiterated FY24 growth in the low double-digit to mid-teen range.
- Nevertheless, weakness within Consumer and Specialty Products will likely persist for the remainder of the year, culminating in RPM's reduced FY24 revenue growth outlook of a low-single-digit percentage down from mid-single-digits.
Relative strength in RPM's Construction Products and Performance Coatings segments was uplifting and bode well for peers PPG Industries (PPG) and Axalta Coating Systems (AXTA), both of which have significantly greater exposure to performance and industrial coatings than RPM. Conversely, given the elevated interest rates, existing home turnover has been at a multi-decade low over the past couple of years. Until interest rates fall and homeowners begin to consider moving, RPM's Consumer and Specialty Products segments may remain under pressure, a bad sign for competitor Sherwin-Williams (SHW).
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