The Producer Price Index (PPI) reflects Wednesday’s Consumer Price Index (CPI) as inflation grows faster than expected. Natural gas prices skyrocket as the eastern-third of the United States faces a cold snap. TD Ameritrade investors were net sellers in December according to the Investor Movement Index. Not all materials sector industry groups react the same to inflation.
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The Producer Price Index and Jobless Claims Were Higher than Expected
The Investor Movement Index (IMD) Provides Insights into TD Ameritrade Clients’ Trading
Basic Materials Sector is a Diverse Group of Industries that Don’t React to Inflation the Same
JJ Kinahan, Chief Market Strategist, TD Ameritrade
(Thursday Market Open) Equity index futures were relatively flat before the Producer Price Index (PPI) and jobless claims were reported. The PPI came in higher than expected at 8.3%; it had been projected to rise 8.0%. All-in-all, the PPI looked similar to Wednesday’s CPI, which means the new earnings season will likely focus on companies that are able to pass higher costs on to consumers without hurting sales growth.
Jobless claims came in higher than expected at 230,000 instead of the forecasted 200,000; meanwhile, continuing claims were lower than expected. Equity index futures were little moved on the news but did turn slightly more positive while the 10-Year Treasury Yield (TNX) stayed around 0.93% higher in premarket trading.
The Federal Reserve Vice Chair Lael Brainard is expected to testify before the Senate Banking Committee on Thursday. Brainard is expected to reflect Chair Jerome Powell’s Tuesday testimony 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 more than 47% in 2021 and is has risen nearly 30% in 2022. Natural gas company Chesapeake Energy (CHK) rallied 4.61% on the news.
A couple of earnings announcements are moving stocks in premarket action. First, Taiwan Semiconductors (TSM) reported better-than-expected earnings and revenue and rallied 4.59% before the opening bell. TSM also increased their forward earnings outlook.
Delta Air Lines (DAL) also beat on top and bottom line numbers sparking a 1.90% premarket rally. Like other airlines, Delta has struggled with Omicron as employees have been ill, resulting in numerous cancellations. Yet the company was able to manage expenses to achieve a profit. DAL warned that it could see a loss in the current quarter because of ongoing issues with COVID-19 but still offered a strong revenue outlook.
By reporting better-than-expected earnings after Wednesday’s close, KB Home (KBH) rose more than 3% in after-hours trading. Unfortunately, the homebuilder missed on revenue due in part to fewer orders. KB reported a bigger-than-expected backlog as the company works hard to meet high demand.
Stocks closed slightly higher on Wednesday as investors digested the largest year-over-year rise in inflation in 40 years. The Consumer Price Index (CPI) reported a 7% rise in inflation over the last year. However, the market seemed to take it in stride and soon rallied. There appeared to be little conviction as the NYSE saw advancers barely outpace decliners.
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 historical levels of resistance and congestion that could slow their growth in the short term.
Materials, consumer discretionary, and technology were the strongest sectors on the day. The materials sector was helped in large part by Freeport-McMoRan (FCX) rising 5% and Mosaic (MOS) rising 3.84%. FCX rallied along with copper futures that rose 3.5% and hit a new three-month high. Analysts from Piper Sandler raised their price target on Mosaic to $43 per share.
The Consumer Discretionary Select Sector ($IXY) rallied 0.65% on Wednesday, driven mostly by Tesla (TSLA). Tesla rose 3.93% on Wednesday on a report that its Giga Shanghai factory is accounting for more than 51% of car deliveries around the globe.
Another consumer discretionary stock that attracted a lot of attention was Crocs (CROX). According to Barron’s, Crocs has seen impressive consumer growth and was named by Piper Sandler as a top stock idea for the second year in a row. Piper Sandler analysts raised their price target on the stock to $246 per share.
An Inside Look
The Investor Movement Index (IMX) is a proprietary, behavior-based index created by TD Ameritrade and is designed to indicate the sentiment of retail investors. TD Ameritrade clients were net sellers of equities in December; the sector mix was interesting as information technology along with consumer discretionary were the only two sectors net bought during the December time frame. The breadth of selling across most sectors along with the buying of short duration and Treasury fixed-income securities caused the IMX to move lower to 7.97 (-9.64%) in December.
Although there was strong selling across most sectors of the S&P 500, clients did find some opportunities to buy certain names during the month. Rivian Automotive (RIVN) made its listing debut on the Nasdaq Exchange in the prior month, reaching highs near $180 per share before pulling back to lows near $75 and was net bought. Electric vehicle makers Tesla (TSLA), Nio (NIO), and Lucid Group (LCID) saw volatile trading through the month, pulling back at first and then stabilizing at lower levels, which clients used as a buying opportunity as well. Ford (F) benefited from strong automotive industry trends in addition to progress on the electric vehicle front, which led to some third-party analysts upgrading the stock that prompted client-buying interest during the month.
On the sell side, TD Ameritrade clients used elevated prices for profit-taking opportunities. Micron (MU) hit all-time highs after posting strong earnings, leading to analyst price target hikes. Clients used this as an opportunity to sell shares on this strength. Taiwan Semiconductor (TSM) hit fresh highs as the company reported stronger-than-expected November sales numbers and was also net sold. Additionally, Taiwan Semiconductor announced plans to build a new plant in Japan, which drove the stock higher over the month and gave clients the opportunity to take profits.
Brick House: Energy stocks tend to have a more direct relationship to inflation because of the central role petroleum products play in the transporting and creation of numerous products. This is why crude oil is by far the largest commodity traded in the world. Looking at the materials sector, we can try to…