The Federal Reserve’s meeting
Low volume stocks are dropping, stuck in an arrest stage and boredom ahead of the Federal Reserve tomorrow. tomorrow.
The S&P 500 quickly gave up yesterday’s final-hour boost, now hovering just below the highs and right at the high print from May 7. Resilience or fatigue, or a combination of the two – the beholder decides.
The S&P 500
Below the surface, there has been some attrition as the market has ground and rotated its way to a marginal new high. The percentage of stocks trading above their 10-week average price has decreased, indicating a subtle narrowing of the tape. On some level, it’s just simple math – the longer the indexes trade sideways while the 50-day average rises, the fewer stocks can keep up. However, this can be a precursor to some choppy sailing ahead.
The drop in May retail sales and upward revision to April reinforce the “past-peak-acceleration” notion, but this is already fairly well understood and reflected to some extent in market action over the last few weeks. Over the last three months, compare equal-weight consumer discretionary to equal-weight S&P 500.
Producer-price growth is faster than expected, which is consistent with the springtime statistical inflation surge pattern, but it is not a big mover in the overall inflation/Fed debate. We’d like to ramp up the drama surrounding Powell’s task tomorrow, but it’s not clear that it’s all that complicated or consequential. Recognizing that the taper discussion must begin soon is merely a confirmation of what we already know. Still assuming a transitory inflation surge, mixed retail/jobs data in recent months suggests a wait-and-see approach through the summer.
Also, people should not assume that “earlier taper” means higher Treasury yields, and vice versa. Yields fell after previous rounds of quantitative easing ended, and a later taper could allow inflation concerns to linger for longer, lifting yields. It’s difficult to predict the reaction after bonds have already experienced a strong counter-trend rally.
Commodities other than oil cooling off fits with the theme of moderating growth and supply issues gradually normalizing. In addition to Bank of America fund managers calling commodities the most crowded current trade (often code for “up a lot and I feel I didn’t own enough of it”), commodity-related ETFs have seen a massive rush of inflows. Needs to calm down, but this is also a very small category in terms of total assets compared to stocks and bonds, so it’s difficult to declare “game over.”
Apple’s stock is slipping a little after a huge surge yesterday. Decision time for this stock, narrowing range, almost but not quite escaping the five-month downtrend line. If we enter a period of slower-than-expected growth, a preference for quality stocks, and buyback-and-dividend plays, it could be AAPL time. For the most part, I’m not sure it’s trading on Apple-specific items right now.
Market breadth is decidedly negative, with a stock-to-volume ratio of 1:2 up:down.
The credit backdrop remains extremely strong. The current average yield on junk debt is 3.84 percent. There is no problem with financial conditions right now, unless one believes they are too loose for the market’s own good.
The VIX is firming up near 17, mostly as a result of the known nearby catalyst, a Fed meeting. Not really about underlying stress, though there are some month-end wild cards in Russell rebalancing, as well as pockets of funky meme-stock energy flowing around the edges.
The stocks ‘Buy online, pay in-store’
According to Goldman Sachs, store fulfillment for digital sales increased to around 60% in the fourth quarter of 2020, up from 43% in the first quarter. Even after the economy reopens, many retailers will likely continue to use a hybrid model due to efficiency and capacity constraints, according to the bank.
According to the report, retailers do not necessarily need to have a footprint in more densely populated areas, but they are better positioned to capitalize on that footprint and the hybrid fulfillment trend.
According to Goldman, Petco’s digital fulfillment in-store increased from 20% in the first quarter of 2020 to 80% by the fourth. This year, the momentum has continued: In the first quarter of 2021, stores fulfilled 83 percent of digital sales, according to the company.
According to Goldman, Target, which also has stores in high-density areas, increased its digital fulfillment in-store by 5% from the first to the fourth quarter, to 85 percent. This is a smaller change than that of Petco and others, but it is significant. Long before the pandemic, Target embraced the “buy online, pay in-store” and curbside pick-up model, and same-day services grew faster than overall digital in the first quarter of this year.
Goldman also singled out Dick’s Sporting Goods as a suburban and Tractor Supply Company as a rural play. Dick’s has also continued to use “buy online, pay in-store” throughout the 1Q of this year.
Tractor Supply’s online orders account for a small portion of total sales, but the company has an above-average store-fulfillment rate among customers who prefer the hybrid transaction, according to Goldman.
Bernstein recommends Sea
The growth of Sea Ltd provides an opportunity for investors to purchase on the leading technology platform in Southeast Asia, says investor Bernstein.
“We believe that Sea Ltd.’s track record of execution ensures that it has the right to win in this scale-up and will likely be at the top in terms of market share in the majority of the verticals in which it operates. “As a result, despite high valuations, we remain optimistic about Sea Ltd.’s prospects,” the note stated.
One important area for Sea is e-commerce, where the company’s Shopee division is a market leader in some emerging markets. Bernstein predicts that Shoppe will break even by 2025.
“In the short term, we believe that Shopee’s successful expansion in [Latin America] and grocery expansion in [Southeast Asia] will continue to be key drivers for the stock. “We believe that increasing GMV scale will assist it in improving take rates, which may increase rapidly, ensuring a faster path to profitability,” the note stated.
The investment firm set a price target of $350 per share, which is 29% higher than the stock’s closing price on Tuesday.