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Chart Advisor: Rebound Stalls

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Friday, 24th September, 2021

1/ Indexes move in small range as traders hedge risk 

2/ Can’t make enough shoes

3Costco overcoming challenges 

4/ The bottom line

1/ Indexes Move in Small Range as Traders Hedge Risk 

Markets remained relatively flat to cap a volatile week of trading. Major indexes all moved well under 1%. Investors seem to be mixed on which direction stocks will move next. On the one hand, fears related to China’s real estate woes have abated, but investors have increased consternation over supply chain issues. 

Supply chain constraints and inflation could have a larger adverse effect on certain sectors over others. Below is a comparison between the recent performance of State Street’s S&P 500 Index ETF (SPY), Invesco’s Nasdaq-100 ETF (QQQ) and State Street’s Consumer Discretionary Sector ETF (XLY). Consumer discretionary is a sector that generally underperforms during times of high inflation. However, XLY has largely led both SPY and QQQ during the pandemic-induced economic recovery.  

Supply chain issues have put a damper on recent company and earnings performance. Shipping prices have increased, and this cost inevitably trickles down to consumers. With inflation already pushing the cost of goods higher, continued supply and labor constraints could force the Fed’s hand into changing accommodative policy sooner than expected.  

2/ Can’t Make Enough Shoes  

Shares of Nike (NKE) were trending lower after the company slashed revenue forecasts in their fiscal first-quarter earnings announcement. NKE reported earnings per share (EPS) of $1.16 and $12.25 billion in revenues—analysts expected $1.12 EPS and revenues of $12.47 billion. The sneaker giant cited supply chain constraints and shipping delays as hurting business more than anticipated, resulting in a less-than-expected growth forecast for the coming quarters. As a result, NKE shares fell 6%.

This quarter’s earnings are in stark contrast to the previous quarter, when NKE shares rose 15% after earnings. Even with today’s drop, NKE shares have gained nearly 7% year-to-date. The chart below illustrates NKE’s recent performance against State Street’s Consumer Discretionary Sector ETF (XLY). The market’s reaction to NKE’s earnings isn’t insignificant. The company has still outperformed its sector. 

Continued supply chain woes could put further pressure on XLY. Coupled with rising inflation, NKE’s earnings could be a preview of earnings results yet to come.  

3/ Costco Overcoming Challenges

The counterargument to supply chain and inflation worries could be Costco (COST), which reported its fiscal fourth-quarter earnings. The retailer beat analyst forecasts for both EPS and revenue. COST reported $3.76 EPS and $62.7 billion in revenue, exceeding expectations of $3.59 EPS and $61.6 billion in revenues. Investors bid up the share price by 3%, close to the company’s all-time highs.  

Even as COST has begun to re-implement purchase limits on some items, the retailer continues to outperform industry stalwarts Amazon (AMZN) and Walmart (WMT), as seen on the chart below. COST remains on a relative uptrend, and has outperformed some indexes, gaining 34% in the last year. AMZN and WMT have risen 12% and 4% in that same span, respectively.  

All businesses aren’t created equal, but COST is an example of a company making do amidst supply chain issues to continue to post positive results.  

4/ The Bottom Line 

Stocks traded into a tight range after the rebound stalled. Nike guided lower but Costco’s results are showing that the company is overcoming supply chain challenges. 

Originally posted on 24th September, 2021

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