This week, CIO Tom Weary, CFA®️, does a deep dive into March’s inflation numbers, explores current trends in retail sales, and shares a host of earnings reports from RFA companies across several sectors.

Transcript

Welcome to the Weekly Market Update.  I am going to begin with an apology. With the market holiday last Friday, it has been two weeks since our last update. So hang on tight as we attempt to cover a tsunami of earnings reports and highlights of important economic data. 

Inflation surged to a new four decade high of 8.5% in March from the same month a year ago, driven by skyrocketing energy and food costs, supply constraints and strong consumer demand, as we can see in this first chart. The Labor Department on Tuesday said the Consumer Price Index last month rose at its fastest annual pace since December 1981, up from the 7.9% annual rate in February. Rising prices have been unrelenting, with six straight months of inflation above 6%. That is well above the Federal Reserve’s 2% target. The so-called Core Price index, which excludes the often volatile categories of food and energy, increased 6.5% in March from a year earlier, as we see in this second chart , up from February 6.4% rise, and the sharpest 12 month rise since August 1982.  Strangely enough, the stock market’s first reaction to these bleak numbers was to go up. The reason for that was likely due to the hope that high inflation may be peaking. As we see in this next chart, the month over month increase in inflation actually shows a divergence with headline CPI skyrocketing due to the surge in energy prices while core CPI is actually rolling over.  Businesses also felt the bite from inflation in March as prices for goods and services surged more than expected. The Producer Price Index, or PPI, rose 11.2% year over year in March on a non seasonally adjusted basis, the Labor Department reported. This is the largest increase since 12 month data were first calculated in November 2010, and follows a 10% increase in February. Economists had forecast PPI to rise 10.5%. The surge hardly comes as a surprise given the inflationary environment, but the rate of its acceleration was faster than expected. 

High gasoline prices accounted for a big share of a March increase in U.S. retail sales as inflation took up a larger part of consumer spending. Consumers increased retail and restaurant spending by 0.5% in March compared with the previous month, the Commerce Department reported, down from the revised monthly increase of 0.8% in February. Sales at gas stations accounted for much of the increase with an 8.9% jump over the previous month, reflecting sharply higher fuel prices related to the Ukraine war. Excluding gasoline sales, retail sales fell by 0.3%. Declines in online shopping and auto sales held back spending totals. Overall retail sales would have been even higher if not for a 1.9% monthly auto sales decline. Auto companies struggled with a vehicle shortage during the pandemic due to supply disruptions, pushing prices up sharply. Sales also declined sharply at online retailers, a 6.4% drop over February. Rising costs, especially for gasoline, are likely to leading to changes in consumers’ behavior to cushion the impact on their budgets. While gasoline prices rose at 18.3% in March over February, the increase in sales was less than half of that. Consumers have moved away from some pandemic era spending habits, shifting more spending to services and away from physical goods. Higher prices have also decreased demand for some discretionary purchases, such as furniture, which saw a modest rise in sales in March that didn’t keep up with inflation. Households instead are spending more on staples such as food, gasoline and utilities, economists said. They also are returning to shop in physical stores rather than online as the surge from the Omicron variant has faded, with sales at non-store retailers declining for three of the last four months. Despite higher prices, consumers have shown a willingness to spend on activities that were limited earlier in the pandemic. Airlines are reporting strong demand for leisure travel, and local economies that are dependent on tourism have been buoyed by the return of out of towners.  Clearly, patterns in retail spending are being buffeted by several crosscurrents. 

Taiwan Semiconductor, the world’s largest contract chip maker and a holding in the Core Portfolio, reported first quarter results that beat on both the top and bottom lines, with revenue of $17.6 billion increasing 36% from a year ago and beating estimates by $1.3 billion, while adjusted earnings of $1.40 cents beat by 9 cents.  Notably, the company accentuated that high performance computing will be its most important growth driver moving forward.  The company signaled that the global chip shortage was likely to continue, with tight production capacity for all types of chips it makes. It expects manufacturers to stock up more than usual on chips and other components after recent events disrupted the global supply chain.  Signaling ongoing supply chain issues in the chip world, after the close on Wednesday Lam Research, a semiconductor equipment maker, reported results that missed on both the top and bottom lines with revenue of $4.1 billion, up 5.5% from a year ago, missing estimates by $180 million, and earnings of $7.40 missing estimates by 11 cents. 

UnitedHealth Group, the nation’s largest health insurer and a holding in the Defensive Portfolio, reported an adjusted quarterly profit of $5.49 per share, 11 cents above estimates, with revenue also topping Wall Street forecasts. Results were helped by growth in the company’s Medicare Advantage business, and it also raised its full year outlook.  Throughout the pandemic, at times when COVID-19 cases have surged, the company has seen levels of usual health care, like colonoscopies and joint replacements, fall off in tandem. Over the first quarter, hospitalizations due to COVID-19 dropped sharply, to around 2,000 in March compared with about 40,000 in January, while most types of health care were at normal levels. So far, United Health isn’t seeing problems due to care put off or canceled during the pandemic, including no uptick in cancer related diagnosis. Health screenings are happening at normal levels, the company said.  Johnson and Johnson reported first quarter earnings that beat analysts’ estimates while revenues missed.  Sales rose in both the Pharmaceutical and Medical Device divisions while dropping in the Consumer Products division, the unit which will be spun off in the near future.   J&J lowered its full year sales and profit outlook, announced it a halt in COVID vaccine sales guidance due to a global supply glut and demand uncertainty. However J&J’s board approved a 6.6% hike in the dividend, which affirms their faith in the future of the company and is real money in our pockets.  Rival Abbott Laboratories reported financial results for the first quarter of 2022 that surpassed Wall Street expectations, boosted by $3.3 billion in sales of COVID-19 tests. However, the company said it’s 2022 forecast remains unchanged. The company posted quarterly earnings of $1.73, which beat analysts’ estimate by 27 cents, helped by strong demand for its COVID-19 tests due to the Omicron variant of the coronavirus. Quarterly revenue increased 13.8% year over year to $11.9 billion, and beat estimates by $900 billion. The company now sees 2022 COVID-19 testing related sales of about $4.5 billion, which it expects to largely occur in the first half of the year. 

JPMorgan Chase reported first quarter profit dropping 42%, weighed down by lower Wall Street fees and higher expenses. The nation’s biggest bank earned $8.3 billion, or $2.63 per share, compared with $14.3 billion, or $4.50 per share, a year ago. Analysts had expected $2.72 per share. Revenue fell 5% to $30.7 billion, ahead of analysts’ expectations for $30.6 billion. Total expenses, which investors were watching closely, rose 2% to $19.2 billion in the quarter, roughly in line with expectations. Chief Executive Jamie Dimon has stressed the bank needs to invest in its future and the post pandemic era is the right time to do it. JP Morgan took $1.5 billion in total credit charges for the quarter. A year ago, the bank got a $4.2 billion boost from freeing up money it had earlier set aside for potential defaults. The bank said it budgeted $900 million for higher credit losses this quarter because of economic challenges such as inflation and the war in Ukraine, and to account for its exposures in Russia.  First Republic bank reported results which beat on both the top and bottom lines, with revenue of $1.4 billion rising 23% from a year ago, while earnings of $2 per share beat by 11 cents. Tangible book value per share rose 14.2%, while loan originations totaled $17.8 billion, their best quarter ever. First Republic decided to share the wealth with shareholders by raising the quarterly dividend 23%.  In what has otherwise been a challenging earning season for banks, Bank of America’s results topped analysts estimates on both the top and bottom line. Bank of America benefited from a strong pickup in lending activity following a nearly two year drought caused by pandemic stimulus. The bank posted earnings of 80 cents a share, well ahead of the 75 cents per share forecast by analysts. Revenue of $23.2 billion came in slightly above estimates of $23.1 billion. Net income was $7.1 billion, 12% lower than for the first quarter of 2021. 

Lockheed Martin, a Core Portfolio holding, reported forecast beating quarterly profits, but left its full year sales guidance unchanged at $66 billion. The company reported a net profit of $1.7 billion in the latest quarter down from $1.8 billion a year earlier, with sales falling 8% to $15 billion.  Per share profit of $6.44 beat the $6.11 consensus estimate.  Lockheed Martin said it is in talks with the Pentagon about increasing production of weapons destined for Ukraine, though the company has yet to boost output. The U.S. has pledged more than $3 billion in military assistance to Ukraine following Russia’s invasion. 

 Nucor, a leading steel producer and a holding in the Core Portfolio, surged to an all time high on Thursday after easily beating first quarter earnings expectations and forecasting that the second quarter will be the most profitable quarter in the company’s history. Nucor said the latest period was the most profitable first quarter in its history and is confident that 2022 will be another year of very strong earnings and cash flow. First quarter net income jumped to $2.1 billion, or $7.67 per share from $942 million, or $3.10 per share, in the year earlier quarter, while revenues rose nearly 50% year over year to $10.5 billion, citing strong end use market demand for steel and steel products. Nucor expects second quarter earnings will be driven by increased profitability in steel products, which continues to benefit from robust demand in nonresidential construction markets.  In the steel mills segment earnings are expected to strengthen due to increased profitability at its sheet and plate mills. Nucor shares have surged 62% this year and 135% during the past 12 months. 

So, what does it all mean?  Inflation readings are currently still extremely high, but there are some signs that it may be peaking.  Retail sales are weak as consumers spend more of their money on higher priced gasoline.  With the latest COVID surge fading, there are signs that travelers are returning to flying once again.  In the midst of earnings season, most of your companies are reporting strong results.Next week will be another big one for earnings reports, and we will stay on top of every development.  So sit back, relax, have a great weekend, and join us again for the next Weekly Market Update. 

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