This week, CIO Tom Weary, CFA®️, discusses the recent uptick in inflation, as well as its effect on real wages. He also shares Q3 earnings for RFA holdings PayPal, Ahold Delhaize, and The Walt Disney Company.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. The headlines this week were dominated by news of stronger than expected inflation, which we will take a look at first before turning to earnings reports from a few of our companies.

Inflation across a broad swath of products was even worse than expected in October. The consumer price index, which is a basket of products ranging from gasoline and healthcare to groceries and rents, rose 6.2% from a year ago, compared to economists’ estimates of 5.9%. Stripping out volatile food and energy prices, so called core CPI was up 4.6% compared with the 4% expectation.   In a separate report, the Labor Department said real wages after inflation fell 0.5% from September to October, the product of a 0.4% increase in average hourly earnings that was more than offset by the CPI surge. The data come as policy makers such as Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen maintained that the current price pressures are temporary and related to COVID pandemic specific issues.  While they have conceded that inflation has been more persistent than they expected, they see conditions returning to normal over the next year or so. Escalating inflation could cause the Fed to tighten policy more quickly than it has signaled. The central bank has indicated that it will within the next few weeks start reducing the amount of bonds it buys each month, though officials have indicated that interest rate hikes are still off in the future.

After the close on Monday, PayPal reported third quarter earnings of $1.11, which beat estimates by three cents, on revenue of $6.2 billion which rose over 13% from a year ago but missed estimates by $50 million. The company also announced that Venmo users in the U.S. will be able to pay with Venmo on Amazon.com starting in 2022. PayPal gave guidance for its next fiscal year of revenue growing 18% with earnings growing 19% to $4.60. While the results were strong, analysts were disappointed by the relatively weak guidance given by the company and the stock sold off on Tuesday.

Ahold Delhaize, the parent company of supermarket chains Giant Foods and Stop & Shop, maintained its momentum, reporting strong third quarter results and raising guidance on full year underlying operating margin, earnings and free cash flow. On a 2-year comparable sales growth basis, comparable sales in the U.S. were up 15.3% and in Europe were up 7.3% in the third quarter, both of which remain elevated relative to historic levels. Third quarter net sales were 18.5 billion euros, up 4.6% at constant exchange rateS.  Net consumer online sales grew 29.2% at constant exchange rates, building on top of the significant 62.6% growth in the third quarter of 2020. Third quarter earnings per share were 0.53 euros, representing an increase of 8.1% at constant exchange rates versus the prior year. The company raised their 2021 outlook, expecting operating margins to be approximately 4.4% and underlying earnings per share growth to be in the low to mid 20% range versus 2019.

After the close on Wednesday, the Walt Disney company, a holding in the Defensive Portfolio, reported an even more jarring slowdown in Disney+ growth than expected while missing expectations for earnings and sales. Disney reported fiscal fourth quarter net income of $159 million, or nine cents a share, compared with a loss of $0.39 a share in the year ago quarter. After adjusting for restructuring costs, amortization and other effects, the company reported earnings of $0.37 a share, compared with an adjusted loss of $0.20 a share a year ago.  Revenue improved to $18.5 billion from $14.7 billion a year ago. Analysts had expected adjusted net income of $0.52 a share on revenue of $18.8 billion. Recently analysts had focused on the growth in Disney’s streaming efforts. Disney+ added only 2.1 million subscribers in the quarter, a 1.8% increase to 118 million. Analysts had expected 125 million subscribers at the end of the quarter. The streaming segment hauled in $4.6 billion in revenue, roughly in line with analysts’ forecasts. The company’s television networks provided sales of $6.7 billion trailing analysts’ estimates of 6.9 billion, while the film business reported revenue of $2.1 billion which was close to expectations. Disney’s theme parks and product sales segment reported $5.5 billion in revenue as attractions slowly reopened in the U.S. and abroad, a spike from $2.7 billion a year ago.

So, what does it all mean? Investors’ nerves were rattled by a stronger than expected reading on inflation this week. Personally, I tend to agree with Fed Chair Jay Powell that what we are seeing is more likely due to temporary dislocations caused by restarting the global economy, such as a myriad of supply chain bottlenecks, in the face of strong consumer demand. These things have a tendency to resolve themselves over time.   There won’t be dozens of container ships anchored Long Beach port forever. And were inflation to remain persistent, The Fed has plenty of tools in their bag to deal with it in terms of raising interest rates sooner or faster. The stock market’s march higher paused this week on the inflation news, but that might be expected after moving so strongly higher for most of this year. We will continue to monitor developments as they unfold. So, please sit back, relax, have a great weekend, and join us again next week for the Weekly Market Update.

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