GameStop, Boeing, and Uber Trading Lower in Premarket Trading

Equity index futures are pointing lower before the open as the S&P 500 (SPX) tests resistance at its all-time high. After a three-day rally, investors appear to be taking a break ahead of Friday’s Consumer Price Index (CPI) report.  Despite the recent rally and the S&P 500’s relative position to a new high, the Cboe Volatility Index (VIX) is still slightly elevated. The VIX was trading above the 20 level before the bell and appears to reflect a sense of uncertainty that remains among investors.

Investor uncertainty is likely around the Fed’s ability to taper and manage the inflation situation. Many analysts are viewing the flatter yield curve as the bond market telling the Fed it’s going too slow when it comes to tapering. The Fed may feel more comfortable speeding up its tapering plans because initial jobless claims came in at 184,000 this morning which was below the expected 215,000.

Some individual stocks are making moves before the opening bell. After Wednesday’s close, meme stock GameStop GME reported worse-than-expected losses despite higher-than-expected revenue. The company had higher expenses because it loaded up on inventory for the holidays. The company also disclosed an SEC subpoena related to trading activity. The stock fell about 6% in after-hours trading but trimmed its losses to 4.98% in premarket trading.

Food delivery companies like Uber UBER and Just Eat Takaway.com aka GrubHub GRUB are under scrutiny after the European Union’s food commission looks to designate gig economy workers as full-time employees. The move could require these companies to offer certain benefits that will likely increase expenses and hurt company profits.

Looking to the skies, American Airlines AAL announced it will have fewer international flights because of delays from Boeing BA in delivering its new 787 Dreamliner. Boeing is also losing out to its competitor Airbus. According to Reuters, Airbus appears to be winning the contract as the provider to Dutch KLM airline with planes. Boeing was trading 1.15% lower in premarket trading.

On the positive side, CVS Health CVS announced an increase in its dividend and stock buyback program. The news prompted a 3.29% rally in premarket trading. Additionally, furniture store RH aka Restoration Hardware RH rallied more than 9% in premarket trading after beating on earnings.

On Wednesday, communications, materials, and real estate were the top-performing sectors of the day, while consumer staples and financials lagged the market. However, the Technology Select Sector Index ($IXT) and the Real Estate Select Sector Index ($IXRE) set new all-time highs.

The S&P 500 was led by travel and leisure stocks including Norwegian Cruise Line NCLH, Carnival CCL, Royal Caribbean RCL, Las Vegas Sands LVS, and United Airlines UAL. The travel and leisure industry group continues to benefit from the news around the Omicron variant being less harmful than previous COVID-19 variants.

The Economy Gets a Jolt

On Wednesday, the JOLTs, or Job Openings, the report showed an increase in businesses looking to hire. It was the second-highest report in JOLT’s history. Last Friday’s jobs report come in well below expectations, only adding 194,000 jobs to the economy in November. With so many jobs but so few workers, companies continue to struggle filling positions despite increasing pay and adding other perks like remote work if possible.

There are numerous theories why workers aren’t filling jobs, and no one theory seems to explain all the angles. One theory that has some credence is that many workers have chosen to work for themselves. According to Barron’s, the pandemic has sparked a record number of entrepreneurs. The Federal Reserve recorded a jump of more than 300,000 new business applications filed from April to June of 2020. While the number of applications has fallen by 50%, they remain well above pre-COVID-19 levels. 

CHART OF THE DAY: STAPLE REMOVER. The Consumer Staples Select Sector ($IXR—candlesticks) is testing resistance. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Stapling Shut: According to the Refinitiv S&P 500 Earnings Scorecard, 29 of the 32 consumer staples stocks in the S&P 500 have reported Q3 earnings. The staples group was second behind the consumer discretionary sector when it came to beating or meeting analysts’ estimates. The sector saw 76% beating earnings estimates, 3% matching, and 21% missing. Additionally, 90% of staples stocks in the S&P 500 reported higher-than-expected revenues. However, the sector is the second-worst performer for Q3.

One problem with consumer staples is that they’re consistent, which isn’t very sexy, so they don’t attract much investor interest. In fact, when accounting for earnings surprises, staples were the second-lowest. So, while they may beat earnings estimates, it’s not usually by much.

Another issue is that the group doesn’t usually attract attention until investors are looking for dividends or safety. This is a group the does best when the economy is weaker. When markets are falling, consistency suddenly looks very attractive.

Life of Luxury: Investors appear to still be interested in hotter luxury stocks. The S&P Global Luxury Index broke a long-term resistance level in November. After retesting resistance as support, the index appears to be rallying once again. Overall, the index is up more than 13% for the quarter.

With Tesla TSLA as the biggest constituent in the index, the fund has likely benefitted from its strong quarter. Compagnie financiere, LVMH Moet Vuitton, Hermes, and Daimler round out the top five holdings in the index. If you don’t recognize these names, it’s probably because most of them trade on foreign exchanges.

The luxury index is 83.7% consumer discretionary stocks; however, 16.3% are consumer staples. These include companies like Estee Lauder EL, Diageo, and Pernod-Ricard.

Some investors have historically looked at luxury stocks as an indicator of economic health. The theory goes that if the rich are feeling the pinch, it must be pretty bad for the regular Joe. Right now, the rising luxury index suggests that the rich are feeling, well, rich. So, this could be a good sign for the economy. 

Consumer Behavior: The relationship between consumer discretionary and consumer staples sectors is one that some investors keep an eye on as a way of tracking economic strength. Most of the time, discretionary stocks will outperform boring staples stocks, but when staples start to gain strength, it’s time to exercise caution. The last time staples have outperformed discretionary was from mid-2018 to the first part of 2020. Before that, you have to go back to the fall out of the credit crisis—2007 to 2008. Currently, discretionary stocks are outpacing staples, and going back to the Refinitiv S&P 500 Earnings Scorecard, discretionary stocks had a better Q3 earnings grade. However, as inflation eats away at the consumer purchasing power, the tide could turn. 

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

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