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Chart Advisor: Fleeing to Bonds?

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Friday, 3rd December, 2021

1/ Stocks fall and bonds rise after jobs report

2/ Consumer staples sector stocks capture attention

3Big Lots earnings show company still losing money

4/ The bottom line

1/ Stocks Fall and Bonds Rise After Jobs Report

Stocks sold off to end the week after a disappointing jobs numbers report in conjunction with an increase in reported cases of the Omicron variant of COVID-19 in the U.S. Invesco’s Nasdaq 100 ETF (QQQ) fell 1.7% and the iShares Russell 2000 ETF (IWM) fell 2%. State Street’s S&P 500 Index ETF (SPY) lost 0.8%. State Street’s Dow Jones Industrial Average ETF (DIA) fell 0.1%, perhaps protected by the perception of providing a slightly safer haven in the near term.

November’s non-farm payroll report came in lower-than-expected. The economy added 210,000 jobs last month, well below the 573,000 that analysts expected. However, unemployment numbers beat expectations at 4.2%, less than the 4.5% that was expected. 

The chart below compares SPY with iShares’ 20+ Year Treasury Bond ETF (TLT), the U.S. Oil Fund (USO), and State Street’s Gold Trust (GLD). It is interesting to note that with the market selling off, bonds are on the rise while typical inflation hedges such as oil and gold are falling.  

This could perhaps reflect investor concerns over deflation, rather than inflation. With the Federal Reserve recently conceding that inflation may not be transitory, there could be concern that the Fed might go too far too quickly to address inflation, which could suppress prices and cause stagnant growth.  

2/ Consumer Staples Sector Stocks Capture Attention 

Shares of Dollar General (DG) surged 3% after the company beat earnings forecasts for the third quarter. Analysts expected the discount retailer to announce $2.02 in earnings per share (EPS) and $8.5 billion in revenue. DG reported $2.08 in EPS to go with $8.52 billion in revenue. DG lifted its full year profit forecast as consumers search for value amid some of the highest consumer inflation in decades. 

The chart below compares DG with State Street’s Consumer Staples Sector ETF (XLP) and Walmart (WMT). Seemingly no stock has been immune to the overall market selloff of the last week, and the consumer staples sector has yet to see the kind of heavy buying usually associated with inflationary rotation. Since the beginning of 2021, XLP has added 7%, DG has gained 6%, while WMT has surprisingly shed 6%. 

Inflation and supply chain constraints continue to drive consumer prices higher, which has put a strangle on the bottom lines of discount retailers such as WMT and DG. Investors could begin to rotate into the sector whenever the Federal Reserve addresses inflation via rate hikes.  

3/ Big Lots Earnings Show Company Still Losing Money 

Investors bid up the share prices of Big Lots (BIG) by 5% after the company announced third quarter earnings highlighted by a strong start to the holiday shopping season. BIG announced a net loss per share of $0.14 and $1.34 billion in revenue, exceeding expectations of a net loss per share of $0.16 and $1.32 billion in revenue. Despite operating at a net loss, BIG enticed buyers by increasing sales growth amid supply chain issues plaguing the entire sector.  

Even with the earnings-based share price increase, BIG trails both its sector, XLP, and competitor Dollar Tree (DLTR), as illustrated on the chart below. While most equities have enjoyed notable increases coming out of the pandemic, BIG is down 13% in the past year. XLP and DLTR have increased 6% and 21%, respectively, in that same span.  

BIG finds itself in an interesting middle ground in the consumer staples sector. The company does not express the same purchasing power value of competitors like DLTR and DG and isn’t large enough to compete with a sector titan such as WMT. Investors could be looking for more recognizable names among inexpensive retailers.  

4/ The Bottom Line 

Investors surprised by the disappointing jobs report in the U.S. appear to be seeking out bond funds, perhaps fearing that any action the Fed takes will be too much. That may be one reason why some stocks in defensive sectors have lately attracted investor attention. 

Originally posted on 3rd December, 2021

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