The Consumer Discretionary Sector is Getting Hit Hard from Every Angle

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(Friday Market Open) Equity index futures are pointing lower on news from Netflix (NFLX). After the close on Thursday, NFLX reported better-than-expected earnings but missed its subscriber goal by almost half. The miss on subscribers sent investors looking for the exits and drove the stock down more than 19% in after-hours trading. Executives further warned that subscriptions could continue to struggle.

This morning, investors are worried that the Netflix news could be signaling an end to the streaming wars. Disney (DIS) was down 3.90% in premarket trading because streaming has been a growing business for the entertainment company. Companies that rely less on streaming as part of their core business are down a little less; Amazon (AMZN) and Apple (AAPL) were down 1.07% and 0.74% respectively before the bell.

On Friday morning, oil and gas equipment and services company Schlumberger (SLB) reported better-than-expected earnings and revenue. SLB pointed to favorable fundamentals going forward because of the tight supply market, increasing demand, and rising oil prices. However, SLB was down 0.40% in premarket trading which may be related to oil prices falling 1.75% before the open.

Today is January expiration, which is a big expiration for options markets because of the extra volume from LEAPS (long-term equity anticipation securities) contracts. As with any expiration, investors should brace for greater volatility, especially around the close. With the added factor of LEAPS expiration, investors should be particularly careful.

In the health care space, Intuitive Surgical (ISRG) announced that it was able to beat both earnings and revenue estimates. Nonetheless, ISRG fell 4.76% in after-hours trading because the company reported fewer procedures due to COVID-19.

On Thursday, the bulls failed to hang on to another positive start, and now, the S&P 500 (SPX) is testing its November 2021 lows. The benchmark index jumped out of the gate and rallied more than 1.5% in the morning. However, the bears countered and pushed the index lower through the afternoon session and then rushed the close, pushing the index down 1.11% on the day.

Consumer discretionary stocks led the sell-off, with Peloton (PTON) falling 23.93% on news that the company was considering stopping production because of a lack of demand. PTON was seeing a bit of a bounce this morning of more than 5% in premarket trading. V.F. Corporation (VFC) fell 5.39% after being downgraded to a sell by Williams Trading. Ford (F) fell 3.59% after being downgraded by Jefferies. The losses added to a three-day losing streak totaling nearly 14%. The Consumer Discretionary Select Sector Index has fallen nearly 12% from its all-time and is solidly in correction territory.

The Nasdaq Composite ($COMP) dropped 1.3% to test support around the 14,100 level. This level coincides with February and April highs and July and October lows of 2021. The Nasdaq is also in correction territory because its nearly 12% off its all-time highs set back in November of last year.

The semiconductors were a big drag on the tech-heavy Nasdaq, with Advanced Micro Devices (AMD) falling 4.97%, Micron (MU) dropping 5.48%, and Nvidia (NVDA) closing 3.66% lower. The PHLX Semiconductor Index (SOX) has fallen more than 10% in the last three days and is down about 13.5% from its high. However, it’s not all bad news for semiconductors. Intel (INTC) announced plans to invest $20 billion to build two semiconductor factories in Ohio.

For a long time, investors have been in “buy the dip” mode nearly every time the markets pulled back. However, the new trend appears to have changed to the less catchy “find something new to sell”. Investor nervousness continues to creep higher as the Cboe Market Volatility Index (VIX) has moved a little higher every day this week. The VIX is well known for its spikes, but the gradual build that has the VIX trading near 27 is a little uncharacteristic for the fear indicator and feels like a suspenseful Hitchcock movie. The question is, “How long will the suspense hold?”

Slippery Situation

Oil prices have reached a seven-year high and may have plenty of room to grow because supply is struggling to keep up with demand. Last year, President Joe Biden was pressuring OPEC (Organization of the Petroleum Exporting Countries) to increase its petroleum production, but his plea fell on deaf ears. However, OPEC may not have much more spare capacity. Spare capacity is the amount of oil volume that could be brought to market in 30 days and sustained for at least 90 days. According to the U.S. Energy Information Administration, OPEC currently has spare capacity of about 4 million barrels per day, but the highest space capacity in the last 20 years was about 7.5 million barrels per day.

Another issue is that energy companies are struggling to find funding for exploratory drilling. According to Barron’s, many banks and investors grew tired of funding drilling projects that were losing money. Green energy projects are more appealing because of the amount of money governments are willing to put into green energy and reduce the risk to green loans. Bloomberg reported the change in favorability to green energy occurred in 2016 when banks doubled the amount of green debt issuance.

There are many other political risks around oil right now. Regulatory risk: Last year when President Biden came into office, he greatly limited the amount of drilling that could take place on public lands and offshore. Embargo risk: The United States is also trying stop Russia’s Nord 2 pipeline going into Germany as a way to battle Russia’s growing influence in the area. Unrest risk: Kazakhstan experienced unrest earlier this month over its oil production. Additionally, the United Arab Emirates experienced an attack on its oil production infrastructure that stopped the flow of oil through the Kirkuk-Ceyhan pipeline for some time.

Finally, the Omicron variant continues to hurt spare capacity in other countries, halting work on pipelines, slowing the transporting of oil through trucks and trains, and so on. This is all while the largest oil users located in the Northern Hemisphere are traveling less because of their winter season. When the travel season picks up again this spring, higher demand may meet an already cramped supply system. 

CHART OF THE DAY: CRUDE ANALYSIS. Crude oil futures (/CL—candlesticks) recently broke to a new 52-week this week and is trading at levels not seen for seven years. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Picking Out a Theme: Earnings season is barely underway and already 60% of the S&P 500 companies have cited the negative impacts of labor costs on earnings. Of course, only about 10% of the index’s companies have reported thus far, but rising labor costs has surfaced as the top theme according to FactSet.

Other themes observed by FactSet are COVID-19 costs and impact, supply chain disruptions, transport and freight costs, and raw materials and commodity costs. So far, rising interest rates and the Fed have only been mentioned in one report, but this could be a Darkhorse topic. 

Hitting Home: Between the Netflix and Peloton news, the pandemic plays and stay-at-home stocks have really taken a beating in the market. The housing market — a surprising beneficiary of the pandemic —is also experiencing some weakness. Existing home sales fell 4.6% from the previous month and came in lower than expected. The S&P Homebuilders Select Industry Index fell more than 2% on Thursday and is also in correction territory being 15% off its 52-week high. Homebuilders are another industry pulling the consumer discretionary sector lower. With COVID-19 cases turning down, there could be more fallout for these pandemic plays.

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.