Consumer Sentiment Hit a Decade Low Due to Rising Inflation

Stock index futures are pointing to a higher open as President Joe Biden is expected to sign the infrastructure bill. Additionally, President Biden is scheduled to meet with President XI Jinping of China on Tuesday to discuss tariffs and supply chain issues. However, last week’s Michigan Consumer Sentiment report hit a decade low. Inflation is hurting consumers and slowing the recovery in the U.S. and Europe.

This week investors get a heavy dose or earnings reports from retailers. Market gorillas Walmart WMT, Target TGT, Lowe’s LOW, and Home Depot HD are all on the docket. Investors will also hear from a number of Fed members who are scheduled to speak this week. Investors are waiting on comments on where the Fed stands after last week’s inflation report and whether or not they plan to do more or less when it comes to interest rates.

The Dow Jones Industrial Average ($DJI) could get a lift from one of its components. Boeing BA was up more than 3% in premarket trading on reports that the company received several orders for planes after the 2021 Dubai Airshow.

Dollar Tree DLTR is also rallying more than 6% ahead of the opening bell on news that activist investor Mantle Ridge has taken a $1.8 billion stake in the discount store. Investors expect these new investors to push for changes in the company could reflect the success Mantle Ridge had with Dollar General DG.

Another EV maker is going public. Swedish car manufacturer Polestar Automotive is merging with special purpose acquisition corporation Gores Guggenheim GGPI. Gores was up about 14% ahead of the market open.

Despite snapping five-week win streaks on Friday, the major indices still closed higher for the day. Unfortunately, stocks couldn’t climb high enough to offset losses earlier in the week. Materials was the best-performing sector last week, climbing about 2.5%. However, a diverse group of stocks made moves on Friday that helped the rally.

Some of Friday’s movers included crafter marketplace Etsy ETSY, which rallied more than 7%. Whirlpool WHR closed more than 3% higher, building on a five-day win streak. Meta FB closed up 4% with help from comments from Nvidia NVDA CEO Jensen Huang saying the metaverse would be much bigger than people realize. And Netflix NFLX was up 3.8% while Disney DIS fell 1.53%, resulting in Netflix passing Disney in market capitalization.  

In earnings news, the British-based pharmaceutical company AstraZeneca AZN was down 6.55% on Friday after missing on earnings estimates. The company had significantly higher expenses related to its acquisition of Alexion.  

Consumer Contradiction

On Friday, the Michigan Consumer Sentiment report hit a decade low as pessimism among U.S. consumers reached 2011 levels. The report reflected concern over a weaker economy, rising inflation, and an unaffordable housing market. Despite the consumer sentiment, the New York Times reported that a record number of people quit their jobs last month. A contradiction has arisen as people are concerned about the economy and inflation but are willing to walk away from their jobs.

One reason for the contradiction could be the “K-shaped” recovery—studies are showing that many white-collar workers are finding new opportunities that allow them to work from home, may have more personal savings or investments, and bigger retirement savings. These factors may give them confidence in quitting their jobs.

Whereas in many cases, blue-collar workers may not have as many options. Many of them have lower salaries combined with limited opportunities and therefore feel the effects of inflation at a greater rate. So, while stocks could still rally as the economy strengthens, there’s obviously a group of people that are not feeling the effects of the recovery.   

Europe Heating Up

Much of Europe has been rallying with the S&P 500 (SPX). The French CAC 40 (PX1:ENI) and the United Kingdom’s FTSE 100 FTSE were also experiencing five-week win streaks. However, their battles with inflation and energy shortages are still potential roadblocks. Gas and heating oil prices have moved during the autumn months resulting in benchmark gas prices rising to four times higher than normal. In fact, the UK is seeing record gas prices equal to $7.40 per gallon in the United States.

Additionally, much of Europe is seeing seasonal temperatures drop. According to Bloomberg, Italy, Southern France, Spain, and Germany are forecasting lower-than-normal temperatures next week. And the UK’s top energy supplier warned its customers that the icy temperatures could last as long as six weeks.

Next week the eurozone, France, Italy, and the UK announce their respective Consumer Price Index (CPI) numbers. Additionally, the UK’s employment report will also be released. These reports could provide greater insights into how well Europeans are faring with rising energy prices.

CHART OF THE DAY: TOUR DE FRANCE. The French CAC 40 (PX1:ENI—pink) has outpaced the S&P 500 (SPX—candlesticks) over the previous nine months. The UK’s FTSE 100 FTSE has nearly kept pace with the SPX. However, the German DAX DBI has underperformed the group. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. 

European Vacations?: Many European cities are already canceling their holiday celebration because of the rising number of COVID-19 cases. The World Health Organization (WHO) reported a 10% increase in Europe over the last week. Many of the cases are coming from Russia and Eastern Europe.

Western Europe seems to be doing better, which the WHO attributes to higher vaccinations rates. Nonetheless, some countries are already taking measures. The Dutch government announced three weeks of partial lockdowns, and German lawmakers are meeting to consider potential measures. However, many German cities went ahead with their outdoor Carnival celebrations despite the rising case count.

The United States ended its international travel restrictions on Monday, allowing vaccinated travelers to enter the country. So far, there are no plans to bring the restrictions back, and airlines are not reporting any increases in international customer cancellations.  

Book’em: Travelport is finding that international flights to the United States reached 70% of pre-pandemic levels. The majority of these flights come from the UK, Germany, France, Italy, and Spain. Delta DAL announced that it has seen a 450% surge in international flight bookings in the six weeks following the announcement of the repeal of the international flight ban.

Americans are taking to the skies for a little turkey. According to Adobe Digital Insights, airline bookings are up 78% for Thanksgiving compared to last year. As a result, airfares have also risen and are nearing 2019 prices.

Turbulence: Outside of the rising COVID-19 cases and potential government actions, airlines are dealing with other issues. The International Air Transport Association (IATA) reports that jet fuel prices are up 125.7% from a year ago in the European Union and the Commonwealth of Independent States, 105% in North America, and 116.8% in Latin and South America. However, last week fuel prices were down 1.1% overall. If oil prices continue to rise, the cost of jet fuel could cut into airline profitability. These costs could be reflected in higher ticket prices.

Additionally, airlines continue to struggle with labor shortages, which are resulting in long queues on the phone and at the airport. Of course, worse than standing in line is the flight cancellations. Southwest LUV and American Airlines AAL have both experienced hundreds of high-profile flight cancellations due to staffing and weather. According to CNBC, Southwest’s October cancellations totaled more than 2,000 flights and cost the company $75 million in revenue. American canceled more than 1,700 flights.

Perhaps it was a good thing for holiday travelers that the staffing issues occurred before the holiday season because airlines are working hard to get their staffing problems under control so they can reduce holiday turbulence.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image Sourced from Pixabay