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Business

U.S. stocks struggling to make ‘crazy’ bounce-back rally stick as earnings season gets under way

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U.S. stocks saw early gains fizzle Friday, with the market turning south after attempting to build on a bounce in the previous session that marked what’s been called one of the craziest market days in history.

Stocks turned lower after a closely watched survey showed consumer inflation expectations were on the rise, while investors were also weighing a round of results from big Wall Street banks as earnings reporting season gets under way.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -0.80%
    fell 223 points, or 0.7%, to 29,815, after rising 390 points at its session high.
  • The S&P 500
    SPX,
    -1.67%
    was down 58 points, or 1.6%, at 3,612.
  • The Nasdaq Composite declined 227 points, or 2.1%, to 10,422.

On Thursday, the Dow erased a plunge of nearly 550 points to end 828 points higher, while the S&P 500 bounced back from a loss of more than 2% to end 2.6% higher, and the Nasdaq Composite jumped 2.2%.

The Dow’s 2.8% rise was the largest one-day gain since Nov. 9, 2020.

See: Why stocks scored a historic bounce after another hot inflation report

What’s driving markets

Gains early Friday gave way to losses after the University of Michigan’s consumer sentiment survey showed expectations for inflation over the next year rose to 5.1% from September’s one-year low of 4.7%, while expectations for inflation over the next 5 years ticked up to 2.9% from 2.7% last month.

“The uptick in inflation expectations probably is a response to the increase in gas prices in recent weeks, in which case it won’t continue,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note, observing that preliminary readings tend to see big revisions.

“Still, on the heels of the September inflation data this rebound — reversing the drop last month — does not look good, given how closely policy makers appear to track the measure,” Shepherdson said.

The survey’s gauge of consumer sentiment rose to 59.8 in October from 58.6. Economists were expecting a reading of 59, according to a Wall Street Journal poll.

Data Friday also showed U.S. retail sales were unchanged in September, coming in below forecasts for a 0.3% rise. Excluding autos, sales rose 0.3%.

Analysts cited a number of factors to explain the huge rise in stocks on Thursday, which came after equities initially tanked following a hotter-than-expected September consumer-price index reading.

Factors behind the bounce included technical and positioning considerations after a steep selloff that had seen the S&P 500 index tumble for six sessions in a row to end Wednesday at its lowest since November 2020.

“Among the most frequent explanations is that the most pessimistic of all possible scenarios were built into prices: a 75-point rate hike at the next two meetings,” said Alex Kuptsikevich, senior market analyst at FxPro, in a note. “After this, market participants turned their attention to substantial discounts to prices from their highs with a relatively healthy economy that continues to create jobs and raise wages,”

But caution still prevailed on Friday.

“Despite October’s notoriety as a ‘bear market killer’ and an auspicious intraday move, investors should maintain a certain degree of caution. A real change in trend requires a shift in fundamentals. And those changes are still not easy to identify,” Kuptsikevich said.

Rick Rieder, the chief investment officer for fixed income at BlackRock, told MarketWatch’s Christine Idzelis that Thursday’s gyrations marked one of the “craziest” days in market history, coming after data showing U.S. September inflation running at a hotter-than-expected pace.

“One of the largest intraday reversals in recent memory off a closely watched CPI print underscores the oversold condition and sentiment extreme in this market. The vulnerability wasn’t in the number, the vulnerability was in the positioning leading up to the number,” said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.

BlackRock’s Rieder advised investors to consider parking their money in short-term bonds, a point recently echoed by hedge-fund legend Ray Dalio.

Shares of JPMorgan Chase & Co.
JPM,
+3.39%
were up 2.7% after the bank and Dow component beat Wall Street targets for earnings and revenue.

Analysts were also weighing results from Wells Fargo & Co.
WFC,
+3.52%
and Morgan Stanley
MS,
-4.25%,
and Citigroup Inc.
C,
+1.43%.

See: JPMorgan profit falls but beats estimates while Wells Fargo misses

Investors were also monitoring developments in the U.K., where Prime Minister Liz Truss fired Kwasi Kwarteng from his role as chancellor of the exchequer. Yields on U.K. government bonds spiked after Kwarteng presented a budget plan that included large tax cuts in late September, sparking a crisis that required the Bank of England to step in with an emergency buying program.

Read: Why Kwasi Kwarteng could not survive the battle with the Bank of England

U.K. bond yields initially dropped on Friday on indications many of the planned tax cuts would be reversed. But they later rose after Truss only reversed corporate tax cuts.

Also see: Larry Summers says U.K. debt market stress could be the ‘tremor’ signaling global economic ‘earthquake’

The Federal Reserve needs to continue raising interest rates but should be careful about the pace of these moves, Kansas City Fed President Esther George said on Friday.

Companies in focus
  • Wells Fargo
    WFC,
    +3.52%
    shares rose 3.8% after the bank posted stronger-than-expected revenue for the third quarter, offsetting a profit miss.
  • Shares of Morgan Stanley
    MS,
    -4.25%
    fell 4.5% after the investment bank missed Wall Street’s targets for earnings and revenue amid a drop in deal activity.
  • Citigroup
    C,
    +1.43%
    shares rose 1.9% after the bank topped Wall Street forecasts on earnings and revenue.
  • UnitedHealth Group Inc.
    UNH,
    +1.77%
    shares were up 1.6% after the Dow component and health insurer reported third-quarter profit and revenue that rose above expectations, and lifted its full-year outlook for a third-straight quarter.
  • Kroger Co.
    KR,
    -5.04%
    announced a $24.6 billion deal to buy Albertsons Cos. Inc.
    ACI,
    -7.39%.
    Under the terms of the merger agreement, Kroger will acquire all of the shares outstanding of Albertsons’ common and preferred stock for an estimated $34.10 per share. Kroger shares fell 4.9%, while Albertsons was off 7%. Shares of Albertsons jumped more than 11% Thursday on reports of a potential deal, while Kroger rose 2%.
  • Beyond Meat Inc.
    BYND,
    -6.02%
    shares fell 6.2% after the plant-based food company issued a revenue warning, announced a plan to cut about 200 workers and said it’s cutting other costs as it makes a strategic shift aimed at achieving positive cash flow operations.

Also see: Beyond Meat COO Douglas W. Ramsey is leaving the company after being suspended for allegedly biting a man’s nose

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Business

U.S. Retail Sales Declined 0.3% in May

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Americans’ retail spending declined in May, as consumers felt the pinch from inflation, higher gasoline prices and rising interest rates that make car purchases more expensive.

Retail sales—a measure of spending at stores, online and in restaurants—fell a seasonally adjusted 0.3% in May from the previous month, dropping from April’s revised 0.7% increase, the Commerce Department said Wednesday.

A sharp drop in vehicle sales—due to high prices, low inventory and rising interest on car loans—played an outsize role in the decline in month-over-month retail spending. Excluding autos, retail sales rose 0.5% last month.

Excluding gasoline station sales, retail spending fell 0.7% in May from April—a sign that high gas prices are taking up a greater share of consumers’ spending. Receipts at gas stations jumped 4% in May from the prior month.

Interest rates look set to rise further, a potential damper on consumer spending in the months ahead as car loans and credit-card debt get more expensive. Later Wednesday, the Federal Reserve is set to wrap up a two-day policy meeting. A string of troubling inflation reports in recent days is likely to lead Fed officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest-rate increase.

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In what ways have you adjusted your spending because of inflation? Join the conversation below.

Craig Johnson,

president of Customer Growth Partners, a research and consulting firm, said he anticipates a slowdown in retail spending.

“We’re in a little bit of a watershed in terms of what’s going to happen to the economy,” Mr. Johnson said. “The American consumer—she’s very resilient, but she’s not infinitely resilient.”

So far this year, consumer spending has broadly held up, according to government data through April. Consumer spending accounts for about 70% of U.S. economic output. A strong labor market and rising wages are helping to support spending on services, for which there is pent-up demand from the pandemic.

A number of factors are contributing to the expected moderation in retail spending. Consumers are continuing to shift spending to services from goods as many Americans resume more in-person activities such as travel and dining out.

Where in Americans’ household budgets is inflation hitting the hardest? WSJ’s Jon Hilsenrath traces the roots of the rising prices to learn why some sectors have risen so much more than others. Photo Illustration: Laura Kammermann/WSJ

Higher prices are also giving consumers pause, analysts say. Retail sales aren’t adjusted for inflation. While consumers have continued to spend, they are getting less for their money due to rapidly rising prices. The dynamic is also driving an expected shift from discretionary purchases such as furniture and electronics to essentials like food and gasoline. Record prices for a tank of fuel mean spending at gas stations likely increased last month.

The average cost of a gallon of regular gasoline exceeded $4.60 a gallon in late May, up from about $3 a gallon a year earlier, according to the U.S. Energy Information Administration. Prices in June have risen above $5 a gallon.

Logan CoBell, 33 years old, who works in Chicago as a bartender and substitute teacher, said he is driving only for essential reasons, such as commuting to work, to save money on gasoline. He is watching his spending at the grocery store by cutting down on purchases of red meat and opting for cheaper alternatives such as pork and nonorganic chicken.

Mr. CoBell said he was holding off on upgrading to a new computer “so I have cash in hand just in case something weird happens, like another shutdown.”

U.S. consumer inflation reached its highest level in more than four decades in May, according to the Labor Department’s consumer-price index, as surging energy and food costs pushed prices higher.

Logan CoBell of Chicago says rising prices means he drives only when he needs to and has cut back on pricier groceries, including red meat.



Photo:

Alicia Castaneda

Companies are struggling with higher inflation, which they say is increasingly hard to pass on to consumers. Some large retailers such as

Walmart Inc.

and

Target Corp.

in recent weeks reported steep profit declines as rising supply-chain, wage and inflation-related costs ate into earnings.

Inflation and high fuel prices are also taking a toll on consumer confidence. Last week the University of Michigan reported that an index of consumer sentiment dropped in June to its lowest point since the inception of the survey in the late 1940s.

Bill Stoops, a 72-year old retiree living in San Diego, said the hit to asset values from financial-market turmoil in recent months means he is pulling in some spending.

“We thought about planning a trip to France and Germany, maybe Italy—we still want to do that but we don’t see it for this year at all,” he said, adding “I’m no longer talking about replacing my current fun car with another fun car.”

Write to Harriet Torry at harriet.torry@wsj.com and Rina Torchinsky at rina.torchinsky@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Caterpillar Earnings Beat Expectations. Why Its Stock Is Dropping.

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Text size

Caterpillar earth-moving equipment


Scott Olson/Getty Images


Caterpillar

stock is slipping after the machinery manufacturer reported robust sales and earnings Friday morning. Unfortunately, inflation is rearing its ugly head.

Caterpillar (CAT) reported a profit of $2.60, beating estimates for $2.41, on sales of $12.9 billion, ahead of forecasts for $12.5 billion.

“Our dedicated global team remains focused on serving our customers, executing our strategy and investing for future profitable growth,” Caterpillar CEO Jim Umpleby said in a statement. “We’re encouraged by higher sales and revenues across all regions and in our three primary segments, which reflect continued improvement in our end markets.”

Caterpillar stock was off 2% at $208.30 at 7:12 a.m. in premarket trading. It was a good quarter, but rising costs seem to be hitting the stock.

Caterpillar management said in the news release that profit margins in the third quarter would “moderate” from the second quarter. What’s more, operating profit margins in the company’s construction and mining divisions slipped from the first quarter into the second quarter, going from 17.8% to 16.8%. Higher material costs, as well as higher R&D costs, hurt results.

Rising commodity prices have been an issue for all manufacturers. Steel prices, for instance, averaged more than $1,500 a ton in the second quarter, up from about $1,200 a ton in the first quarter of 2021 and up from about $500 a ton in the second quarter of 2020. So far in the third quarter, steel prices are averaging about $1,800 a ton. The problem of rising costs isn’t going away.

At least demand isn’t a problem. Sales into the construction and mining industries rose more than 40% year over year. Sales in both divisions grew sequentially compared with the first quarter, to $8.2 billion $7.8 billion.

Caterpillar stock had dropped 8.5% during the past three months and was up 17% so far this year. The

S&P 500

has gained 5.8% during the last three months and 18% in 2020, while the

Dow Jones Industrial Average

has risen 3.7% during the past three months and 15% this year.

Shares are down about 14% from their June 52-week high of almost $247.

Caterpillar management hosts a conference call at 8:30 a.m. Investors and analysts will be interested in the outlook for raw material inflation.

Write to Al Root at allen.root@dowjones.com

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Business

U.S. Retail Sales Rose in June

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U.S. shoppers boosted retail spending in June as the economy more broadly reopened and auto dealers navigated supply disruptions.

Retail sales—a measure of purchases at stores, at restaurants and online—rose 0.6% last month compared with May, the Commerce Department reported Friday.

Auto sales, which have shown signs of slowing amid supply-chain disruptions that have limited the number of vehicles for sale, weighed on overall retail sales in June. Excluding autos—a sometimes volatile category of products—sales rose 1.3% in the same period. Auto sales, meanwhile, fell by 2%.

Retail spending had slowed in late spring after surging earlier in the year from the impact of federal coronavirus aid to households. June’s increase marks a pickup in consumer spending.

Consumers in June spent more on products and services associated with the resumption of outside activities as governments ended many remaining Covid-19 restrictions. Sales rose strongly at restaurants and bars and clothing and accessories stores. Meanwhile, sales fell in categories that benefited from strong demand earlier in the pandemic as Americans stayed at home. Sales at furniture, sporting goods and building materials stores fell.

Supply-chain disruptions have limited the number of vehicles for sale.



Photo:

David Paul Morris/Bloomberg News

“Fast forward to June, it’s almost a perfect flip-flop,” said

Tim Quinlan,

senior economist at Wells Fargo. Consumers are now thinking “anywhere but home,” which should benefit retailers in industries that were hard-hit earlier on, he said.

Ann Leadbetter, co-owner of Meriwether Cider in the Boise, Idaho, area, said business has picked up at the cidery’s two locations since mask mandates were lifted earlier this spring. Once that restriction was eased, Ms. Leadbetter said she felt comfortable returning seating to the inside bar areas. She also has noticed a pickup in tourists and events, which she said is particularly helping the business’s location in downtown Boise.

“We anticipate an uptick when the weather warms up anyway, but this has been even better than the usual seasonal uptick that we’ve had in past springs and summers,” Ms. Leadbetter said. “Even if it levels out, it’ll be better than 2020, and it’s already a lot better even than 2019.”

Many economists have said they expect consumers to shift spending away from purchases of goods, particularly big-ticket items, to the services sector as the end of pandemic-related restrictions allows the economy to open more fully and Americans to resume outside activities.

A Bank of America tracker of credit- and debit-card spending showed consumers in June boosted expenditures at restaurants by 2.7% and on lodging by 7.8% compared with May, on a seasonally adjusted basis. Spending for clothing, general merchandise and at department stores also rose strongly, while spending on furniture fell.

“Sectors that were buoyed by the pandemic are slowing down a little bit, but not to a degree that I’d be concerned about,” said Felipe Chacon, an economist at payments company Square. “Household finances have been bolstered by a few rounds of stimulus spending, so it bodes pretty well,” for retail sales broadly, he said.

The National Retail Federation, a trade association, in June lifted its forecast for annual retail sales this year to between $4.44 trillion and $4.56 trillion, from $4.33 trillion to $4.44 trillion previously.

Katherine Cullen,

senior director of industry and consumer insights at the trade group, said the upwardly revised forecast reflected a strong pickup in the overall economy and better-than-expected retail sales growth.

She expects goods retailers that offer products related to activities in the services sector, such as traveling, to see further strength in the coming months. She also forecasts brisk back-to-school sales as families stock up on products they didn’t need last year because many students were learning remotely.

Economists have said they expected consumers to shift spending from goods to services like dining out as pandemic restrictions are lifted.



Photo:

Stephen Zenner/Zuma Press

Still, some retailers have said that challenges attracting workers for open positions and supply-chain disruptions are placing constraints on business.

A semiconductor shortage helped drive up prices for autos in June. The Federal Reserve on Thursday reported that U.S. manufacturing output fell slightly last month, as motor vehicle and parts production dropped sharply.

Alan Guyes, co-owner of electronics retailer Audiotronics in Roanoke, Va., said demand has been robust since last summer for items such as televisions, smart speakers and sound bars, with in-store traffic picking up in recent months as the pandemic has eased. But he said he often encounters customers looking for products that are either unavailable or on several-months’ backlog because of supply-chain issues ranging from input shortages to long shipping times.

“It’s frustrating, obviously. Some days, it’s a lost sale. Customers are frustrated. We’re all used to being able to ‘just in time’ anything,” he said, referring to the ability to obtain products at or close to the time they are needed.

Federal Reserve Chairman

Jerome Powell

has said he expects upward price pressures to ease as supply-chain issues and friction associated with the economy ramping up are resolved.

Mr. Quinlan of Wells Fargo said he doesn’t expect price increases to deter Americans from spending for now.

“Right now, consumers are price takers,” Mr. Quinlan said, noting many households have cash on hand from savings during the pandemic and the start of monthly payments of the expanded child tax credit.

“The pent-up demand is so great,” for spending on items like vacations, rental cars and flights, he said. “Once that sugar high has worn off, then you’ll start to see ordinary price sensitivity come back into consumer behavior.”

Write to Amara Omeokwe at amara.omeokwe@wsj.com

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Tesla is in decline, SUVs are king, and more insights from the world’s largest electric-vehicle market

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Europe overtook China in 2020 to become the world’s largest market for electric vehicles, amid a pedal-to-the-metal push to increase EV adoption from governments and supercharged demand from consumers.

The registrations of new electric vehicles topped 1.33 million in the key European markets last year, compared with 1.25 million in China, according to a report based on public data by automotive analyst Matthias Schmidt.

The 18 markets include the European Union states — minus 13 countries in Central and Eastern Europe — as well as the U.K., Norway, Iceland, and Switzerland.

And growth will only continue, according to Schmidt, who publishes the European Electric Car Report. He projects that electric vehicles’ share of the European car market will rise from 12.4% in 2020 to 15.5% in 2021 — that is 1.91 million vehicles out of a total of 12.3 million, and an increase of 572,000 from 2020.

Key trends have emerged as Europe races to become the most important region for EVs, highlighted in the report that Schmidt shared with MarketWatch.

Among them are that the Renault Zoe is now the most popular electric vehicle in Europe, overtaking Tesla’s Model 3, which took the top spot in 2019. In fact, Tesla’s success in Europe has declined across the board over the last year, with the U.S. company delivering 97,791 cars across the continent in 2020, down from 109,467 in 2019.

Here’s what you should know:

SUVs are leading the growth

When you think of environmentally-friendly vehicles, sport-utility vehicles and crossovers probably don’t spring to mind. But this class is by far the most popular type of battery-electric vehicle in Europe, representing 27% of all registrations in 2020 and 29% in December alone.

Hyundai
005380,
+0.42%
and Kia
000270,
-1.22%
led the pack, making up 39% of battery-electric SUV and crossover volumes in 2020.

SUVs and crossovers are even more popular with hybrid buyers — accounting for 53% of plug-in hybrid electric-vehicle volumes last year.

Luxury buyers prefer hybrids

When it comes to hybrids, better is best. Premium brands made up 58% of all plug-in hybrid electric-vehicles in 2020.

Many of those cars were supplied by the German automotive giants: Volkswagen Group
VOW,
-0.40%,
which owns Audi and Porsche, Mercedes-Benz owner Daimler
DAI,
+0.46%,
and BMW
BMW,
-0.19%.

There is a coming wave from China

As Chinese car makers increase efforts to meet market demand at home and abroad, they are looking at Europe.

The volume of electric vehicles in Europe that were made by Chinese companies grew 1290% from 2019 to 2020, to 23,800 units. Much of that momentum came only recently — half of those cars arrived in the final three months of the year.

As Europeans scrambled to buy electric vehicles, the flow of cars from China also included Teslas. In December, 20% of all Tesla
TSLA,
+5.83%
models registered in Austria were manufactured in China.

Also read: Audi is betting on the luxury market in a new electric-vehicle venture with China’s oldest car maker

Government action is speeding up EV adoption

European car makers are being pushed to manufacture more electric vehicles by the threat of hundreds of millions of euros in fines from the European Union over binding emissions targets. 

Phased in through 2020, and continuing into 2021, the fleetwide average emission target for new cars must be 95 grams carbon dioxide per kilometer, which is around 4.1 liters of gasoline per 100 kilometers.

In the wake of the post-Brexit trading agreement, the U.K. government said that the country’s car makers face emissions targets “at least as ambitious” as in the EU.

EV adoption is being pushed on both sides of the market, with governments stimulating demand by providing generous incentives for buyers to trade in their gas guzzlers.

In Germany, buyers can save up to €9,000 ($10,940) on purchases of new electric vehicles. France offered incentives of up to €7,000 in 2020, but will trim that down to €6,000 in 2021. 

Regulation could hurt some bottom lines in the short-term

Volkswagen Group confirmed last week that it had not met the EU’s emissions targets for 2020, meaning that the company is on the hook for more than €100 million in fines.

Others could face the same fate, though rivals Daimler, BMW, Renault
RNO,
-0.58%,
and Peugeot (now part of Stellantis
STLA,
+1.05%
) all say they met their targets.

“Despite very ambitious efforts in electrification, it has not been possible to meet the set fleet target in full. But Volkswagen is clearly well on its way,” said Rebecca Harms, a member of the independent Volkswagen Sustainability Council.

“The key to success will be to give a greater role to smaller, efficient and affordable models in the electrification rollout.”

It is unclear how easy that will be in 2021. The COVID-19 pandemic contributed to the fewest passenger-car registrations in Europe since 1985 and, according to Schmidt, this allowed a number of car makers to meet emissions targets.

Also read: Car makers put the pedal to the metal on electric vehicles in 2020, with sales surging in one key region where Tesla lost market share

Tesla is losing dominance

Tesla comfortably topped the European EV charts in 2019. It delivered more than 109,000 vehicles that year, making up 31% of the region’s battery electric-vehicle market. 

But the tide turned in 2020, with Tesla dropping behind both the brands of Volkswagen Group, which had 24% market share, and the Renault–Nissan–Mitsubishi Alliance, with 19% market share. Last year, Tesla delivered nearly 98,000 vehicles and made up just 13% of the European market.

According to Schmidt, it was the introduction of emissions targets, and the specter of massive fines, that has accelerated European car makers’ battle against Tesla for dominance.

See also: Electric-car sales jump to record 54% market share in Norway in 2020 but Tesla loses top spot

“With 2021 getting even tougher — thanks to the phase-in year ending — Tesla will come under even more intense competition,” Schmidt said. “Come 2025 when the targets increase again, Tesla will certainly be playing against fully-fit opponents and will potentially struggle.”

However, Schmidt does note in his market outlook for 2021 that the opening of Tesla’s factory in Germany, expected to start production in the second half, is likely to double regional volumes next year.



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