1) Overnight Tuesday, Wall Street rose for a third straight day on a combination of strong corporate earnings and falling bond yields. Excerpt from Bloomberg…
Investors still expect the Fed to raise rates by three-quarters of a percentage point during its meeting next week. But recent economic data is already showing that Fed tightening has started to weigh on the US economy, leading investors to speculate that the central bank may be approaching the end of its aggressive tightening campaign. This renewed expectation of less hawkishness from the Fed, as well as a better-than-expected earnings season so far, have pushed stocks higher in recent days.
2) Earnings from Coca-Cola and General Motors topped estimates. But the wheels fell off after the market close, with Google parent Alphabet missing earnings estimates and fellow tech-giant Microsoft reporting a disappointing revenue forecast.
In after-market trading, both the Alphabet share price and the Microsoft share price fell more than 6%.
It was only yesterday when I said "earnings risk" might usurp the risk of higher interest rates as the dominant driver of equity markets.
Most of the heavy lifting has already been done on interest rates. Although there's a lag, the desired effect – a slowing of economic growth – is starting to show up in corporate results. If Alphabet and Microsoft are feeling it, you can bet your bottom dollar companies with much less of a competitive advantage will be paddling upstream.
This bear market rally may be about to run out of steam.
3) Turning to Australia, the ASX 200 is largely flat in afternoon trade, at first following Wall Street's lead higher, then falling back after Q3 headline inflation jumped to an annual rate of 7.3%, higher than expectations.
Naturally, Australian bond yields rose as talk of the RBA raising interest rates by 50 basis points on Melbourne Cup day came back into play. That said, according to the Australian Financial Review, interbank futures are implying only a 25% chance of the RBA hiking by 50 basis points.
Markets have been hanging on the prospect of central banks slowing their rate of interest rate increases. For the time being, inflation is winning the battle, with equities, despite their recent bounce, coming a long second.
4) Speaking of earnings risk, one of today's victims is Codan Ltd (ASX: CDA), the company best known for its gold metal detectors.
The Codan share price is being taken to the woolshed today after it forecast a significant contraction in first-half sales at its dominant Minelab division. Here's what the company said:
Like many businesses we are operating under challenging market conditions, with geopolitical issues, a high inflationary environment and an increasing risk of global recession. The risk of declining sentiment may impact sales in the short term and management continues to monitor this risk closely.
The company expects sales for Minelab to be in the region of $75 to $80 million in the first half of FY23, compared to $138 million in the prior corresponding period. The reduction primarily relates to the disrupted nature of the African market, normalisation of sales as we transition to living with COVID…
Codan joins a long line of COVID beneficiaries – government stimulus in some African countries was seemingly spent on buying gold detectors – turned post-COVID flops.
Codan shares are now down 80% from their June 2021 high. Ouch.
5) One of the other high profile COVID boom-to-bust stocks is Kogan.com Ltd (ASX:KGN).
Unlike Codan, the Kogan share price is on the rise today despite reporting first-quarter gross sales falling 38.8%, cycling a quarter in the prior year that was heavily impacted by COVID-19 lockdown orders, a period when online retailers saw booming sales.
Investors today were buoyed by Kogan accelerating the sale of its final excess inventory, with the ever-optimistic Ruslan Kogan saying he does not believe the first quarter trading result is indicative of its projected trading performance.
Inflation and rising interest rates are putting pressure on households across Australia and New Zealand. It's in the Kogan.com DNA to obsess over delivering the most in demand products and services at the best possible prices. We know that during periods of belt tightening like this, our responsibility to be the best place for Aussies and Kiwis to get a bargain on their key household items is more important than ever.
Good luck to Mr Kogan and his Kogan.com business. Kogan.com shares have fallen 86% from their October 2020 peak, although they have bounced almost 30% higher off their July 2022 low.
Whilst Kogan does indeed compete on price, it's not the only discount retailer on the web. And when belts are being tightened, replacement cycles for cheap TVs and the like just might blow out a little.
6) The consumer discretionary stock I'm playing for the coming economic slowdown is Best & Less Group (ASX: BST).
50% of its sales are in the baby and kids market. As children grow, they need bigger clothes, so there is a repeat purchase element to the business. 90% of its items sold retail for less than $20 and their average selling price is a modest $8.33.
Best & Less is profitable, has net cash on its balance sheet, and pays an attractive fully franked dividend.
Best and Less shares trade on eight times earnings with a fully franked dividend yield of 9.5%. Whilst not immune to an economic slowdown and having formidable competitors in the likes of Big W and Kmart, there does appear to be a decent level of downside protection for Best & Less shareholders.
