Q1 Revised GDP Shows More Economic Contraction Than Expected

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(Thursday Market Open) Equity index futures were higher before first quarter gross domestic product (GDP) revisions were released. The GDP revision was expected to come in at -1.3% from the earlier -1.4%, but actually ended up being worse at -1.5%. The revision also revealed higher-than-expected inflation growth at 8.1% instead of the forecasted 8%. Equity futures trimmed their premarket gains on the news.  

Potential Market Movers

After a new home sales report earlier this week that was also weaker than expected, investors may focus even more on the pending home sales report arriving shortly after the market open. Pending home sales are expected to drop by 2%, but if the new home sales report is any indicator, that number may be even lower. 

Commodity futures are moving this morning as natural gas has rallied 1.22%,  testing 14-year highs. Crude oil and RBOB gasoline were also on the rise, respectively trading 0.68% and 0.39% higher. Higher energy futures could move energy stocks higher.

A number of stocks were moving ahead of the market open:

• Macy’s M raised its full-year adjusted earnings guidance,  prompting a rally of more than 15% in premarket trading.
• Dollar General DG and Dollar Tree DLTR beat on top- and bottom-line numbers driving a respective premarket rally of 9% and 12.6% for these bargain-shopping leaders.
• Williams-Sonoma WSM jumped 8.44% before the opening bell after topping earnings expectations at its Pottery Barn and West Elm stores.
• Medtronic MDT missed on top- and bottom-line numbers and provided a downbeat earnings outlook causing the stock to fall 3.18% in premarket trading. However, MDT raised its dividend.
• Baidu BIDU crushed its earnings report, sparking a 5.6% rally before the open. BIDU’s revenues were boosted by its AI business despite the slowdown in China.
• Snowflake SNOW beat on earnings and revenue but fell 12.78% in premarket trading after providing below-expectations earnings guidance.
• NVIDIA NVDA also beat on earnings but fell nearly 6% before the opening bell after offering disappointing guidance.

The news from Macy’s, Dollar General, and Williams-Sonoma may boost a retailer group that has been battered over the last two months and build on yesterday’s relief rally. However, the technology sector is likely to be dragged lower by Snowflake and NVIDIA.

The Cboe Market Volatility Index (VIX) doesn’t appear to be ready to call a bottom just yet because it’s still sitting above the 28 level. So, while the VIX has come off its April highs, it’s still sitting in a cautionary position.

Reviewing the Market Minutes

In two out of the last three trading days, the S&P 500 (SPX) has attempted to break above the 3,980 level and failed. This level correlates with highs set back in March of 2021, suggesting that some technical resistance may exist here. Despite not sustaining a break higher, the SPX still had a good Wednesday, rising 0.95%.

The Dow Jones Industrial Average ($DJI) is on track to break its streak of eight straight down weeks—it rose 0.60% on Wednesday and is 2.8% higher for the week. The Dow still has a couple of companies slated to report earnings including Salesforce.com CRM, which reports next week, and Nike NKE which is notoriously behind everyone else and not reporting until June 30.

The Nasdaq Composite ($COMP) rallied 1.51% on the day with help from the consumer discretionary and technology sectors which finished the day among the top three sectors.

Stocks rallied despite a softer-than-expected durable goods report weighed down by fewer orders for automobiles. Volatility resurfaced after the May FOMC meeting minutes were released. For some, the minutes may feel a little dated because so much new information has surfaced in the weeks that followed the May 3-4 meeting.

However, the minutes appeared to confirm what many had guessed, that the Fed was using its rhetoric to get the bond market to drive yields/rates higher so it wouldn’t have to be as aggressive in raising rates to curb inflation. Fed members are still planning on 50 basis point hikes in the next few meetings and cleaning off its balance sheet. However, if inflation persists or if the economy weakens, they may need to rethink their strategy.  

Three Things to Watch 

Bugging Out: Historically, gold has been viewed as a hedge against inflation. Most people think of inflation as rising prices, but in economics, inflation occurs when the money supply expands, whether or not prices rise. The expansion of the money supply is usually followed by rising prices, so the term inflation has come to cover both phenomena. Gold was considered a hedge because it has been used as currency in the past and is therefore an alternative to dollars, yen, rubles, euros, and so forth. Gold is a favorable currency because of the slow growth in the supply of gold helps to maintain its value.

In recent years, many gold bugs have switched to cryptocurrencies because many cryptos have similar characteristics, in regard to limited supply and growth. However, limited supply isn’t the only necessary characteristic determining its value, according to economist Hans-Hermann Hoppe and investor Warren Buffett. Both maintain a currency, like any asset, should provide value beyond just being a currency. Precious metals like gold and silver are favorable because they have uses in jewelry, electronics, aerospace, medicine, dentistry, and more.

This means that when a precious metal is used for exchange, something of value is being traded for something else of value.

Picking a Winner: Cryptocurrencies have struggled of late as rising interest rates and a weaker economy have prompted many investors to steer away from risk assets. Many investors are expecting the shakeout in cryptos to continue. Many believe that cryptocurrencies are here to stay— but which ones will be left standing is harder to say.

According to Jump Crypto researcher Bihar Shah, 84% of new crypto coins are “underwater” within a year of their launch. So, traders trying to pick a winner may want to see what uses their chosen crypto have beyond being a currency. For example, ether is the cryptocurrency associated with Ethereum—a global software platform used to create digital technologies using a blockchain. Bitcoin was developed to be a payment system using blockchain technology as a secure ledger.

The problem with these descriptions is that these other uses aren’t tangible like jewelry and electronics. For some, sorting through cryptocurrencies’ respective value propositions can be complicated and quite vague. Therein lies the challenge of determining which cryptos will have staying power.  

Black Gold: Despite news that Beijing is still ordering COVID-19 lockdowns and issuing punishments and warnings for those violating quarantine rules, oil prices have remained relatively stable. In fact, WTI crude oil futures rose 0.89% to settle at $110.75 per barrel on Wednesday. In the past, tighter lockdowns in China have sparked oil selloffs due to expected lower demand.

Shanghai continues to reopen slowly, but demand for oil from China fell 11.5% in April year-over-year. Earlier this week, the International Energy Agency (IEA) warned that oil prices could surge if China reopens.

Oil prices have started to move incrementally higher, up about 16% from its April 11 low. Further increases could upset the Fed’s plans.

Notable Calendar Items

May 27: PCE Price Index and earnings from Dell DELL, Domo (Domo Inc), and Hibbett Sports HIBB

May 30: Markets closed for Memorial Day

May 31: Conference Board Consumer Confidence Survey and earnings from Salesforce.com CRM, HP HPQ, and Victoria’s Secret VSCO

June 1: ISM Manufacturing Index, JOLTs Job Openings, and earnings from Hewlett Packard HPE, NetApp NTAP, and Chewy CHWY

June 2: Earnings from Broadcom AVGO, Lululemon LULU, and Hormel Foods HRL

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

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.