The Materials Sectors May Not Be As Inflationary As Some Investors Suspect

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key takeaways:

  • Producer Price Index and jobless claims were higher than expected
  • The Investor Movement Index (IMD) provides insight into TD Ameritrade
    trading of clients
  • The basic materials sector is a diverse group of industries that do not react equally to inflation.
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Equity index futures were relatively flat before the Producer Price Index (PPI) and jobless claims were reported. PPI came in higher than expected at 8.3%; It was projected to grow by 8.0%. Overall, the PPI looks similar to Wednesday’s CPI, meaning the new earnings season will focus on companies that are able to pass higher costs to consumers without hurting sales growth.

Unemployment claims came in higher than expected at 230,000 instead of the estimated 200,000; Meanwhile, the ongoing claims were lower than expected. Equity index futures rose slightly on the news but turned slightly more positive, while the 10-year Treasury Yield (TNX) was up around 0.93% in premarket trading.

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Federal Reserve Vice Chairman Lyle Brainard is expected to testify before the Senate Banking Committee on Thursday. Brainard is expected to reflect Tuesday’s testimony from Chair Jerome Powell that the Fed will continue to focus on inflation.

After jumping more than 14% on Wednesday with news of an upcoming cold snap in the eastern-third of the United States, natural gas was down about 4% before the open. Natural gas was up over 47% in 2021 and has grown by about 30% in 2022. Natural Gas Company Chesapeake Energy
(CHK) rose 4.61% on the news.

Some of the earnings announcements are moving the stock into premarket action. First, Taiwan Semiconductors (TSM) reported better-than-expected earnings and revenue and rose 4.59% before the opening bell. TSM also raised its forward earnings outlook.

Air Lines (DAL) also posted a premarket rally of 1.90%, beating the top and bottom line numbers. Like other airlines, Delta has struggled with Omicron because employees are sick, resulting in multiple cancellations. Yet the company was able to manage expenses to make a profit. DAL warned that it could suffer losses in the current quarter due to ongoing issues with COVID-19, but still offered a strong revenue outlook.

By reporting better-than-expected earnings after the end of Wednesday, KB Home (KBH.)
) increased over 3% in after-hours trading. Unfortunately, the homebuilder missed out on revenue due to fewer orders. KB reported a higher backlog than expected as the company works harder to meet higher demand.

high cpi

The stock closed slightly higher on Wednesday as investors digested the biggest year-over-year increase in inflation in 40 years. The Consumer Price Index (CPI) registered a 7% increase in inflation over the previous year. However, the market quickly took to it and soon it picked up. There appears to have been little conviction as the NYSE saw advisors barely outgrow the decline.

The 10-year Treasury Yield (TNX) actually fell 1.20% on the news and despite a 1.90% rise in oil prices. Both the 10-year yield and oil prices are dealing with resistance and congestion at historic levels that could slow their growth in the near term.

Content, consumer discretionary and technology were the strongest sectors on the day. The content sector was helped in large part by Freeport-McMoran.
(FCX) is up 5% and Mosaic (MOS) is up 3.84%. FCX rallied with copper futures rising 3.5% to hit a new three-month high. Analysts at Piper Sandler raised their price target on Mosaic to $43 per share.

The Consumer Discretionary Select Sector ($IXY) rose 0.65% on Wednesday, driven mostly by Tesla
(TSLA). Tesla rose 3.93% on Wednesday in a report that its Giga Shanghai factory accounts for more than 51% of car deliveries worldwide.

Another consumer discretionary stock that attracted a lot of attention was Crocs.
(crocs). According to Barron’s, Crocs has seen impressive consumer growth and was named a top stock idea by Piper Sandler for the second year in a row. Analysts at Piper Sandler set their price target for the stock to $246 per share.

inside view

Investor Movement Index (IMX) TD is a proprietary, behavior-based index created by Ameritrade and designed to indicate retail investor sentiment. TD Ameritrade clients were net sellers of equities in December; The mix of sectors was interesting as information technology with consumer discretionary were the only two sectors that were bought during the December time frame. The IMX lost 7.97 (-9.64%) in December due to the breadth of selling across most sectors, as well as buying of shorter-term and Treasury fixed-income securities.

Although most sectors of the S&P 500 saw strong selling, clients found opportunities to buy certain names during the month. Rivian Automotive (RIVN) began its listing on the Nasdaq exchange earlier in the month, hitting a high of $180 per share before pulling back closer to $75 and was net buys. Electric vehicle makers Tesla (TSLA), NIO (NIO) and Lucid Group (LCID) saw volatile trading during the month, first pulling back and then stabilizing to lower levels, which customers also used as a buying opportunity. Did. Ford (F) benefited from strong automotive industry trends in addition to progress on the electric vehicle front, which prompted some third-party analysts to upgrade the stock, which spurred customer-buying interest during the month.

On the sell side, TD Ameritrade clients used higher prices for opportunities to take profits. Micron (MU) rose to an all-time high after posting strong earnings, raising analysts’ price targets. Clients used this as an opportunity to sell shares on this strength. Taiwan Semiconductor (TSM) touched new highs as the company reported stronger than expected November sales numbers and so did net sales. Additionally, Taiwan Semiconductor announced plans to build a new plant in Japan, which pushed the stock higher during the month and gave customers the opportunity to take advantage.

brick house: Energy stocks have a more direct relationship to inflation because of the central role petroleum products play in the transportation and manufacture of many products. This is the reason that crude oil is by far the biggest business in the world. Looking at the content sector, we can try to identify other sectors that could be driven by inflation.

Building materials have propelled the materials sector to a higher level due to the strength in the housing market. The COVID-19 pandemic was actually a boom for housing as low interest rates and the lockdown prompted many people to move out of congested metros and sparsely populated areas.

Gold Producer: Another materials group that is likely to benefit from inflation are metals and mining, particularly companies that have high exposure to precious metals. In the past, gold and silver have been used as hedges for inflation. When inflation rises, gold also usually rises.

However, in 2021, gold is yet to live up to its reputation as a hedge against inflation. This may be because the US dollar has actually strengthened over the past year despite rising inflation. This could also be because investors are using cryptocurrencies as a hedge instead of gold. In the end, it could simply be that investors do not think that inflation is a long-term issue. While inflation may last longer than the Fed and other central banks expect, many current issues can still be viewed as demand and supply chain problems related to the pandemic. If inflation continues, metals and mining could benefit.

Take Box: The demand to bring products to market causes the container and packaging group to correlate with retail stock and material stock – meaning the need for cardboard boxes and shipping containers. Rising inflation can lead to higher retail sales figures, but it does not necessarily mean that the number of items purchased is higher. This could mean that the items were more expensive. Fewer items at a higher cost means fewer boxes and containers are needed.

Higher inflation can also translate to fewer chemicals purchased. With many chemicals being petroleum-based, higher oil prices can also mean more difficulty getting crude through refineries, as we discussed yesterday. market update,

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


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