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Stocks Drop as Inflation Jumps, Earnings Disappoint

Friday, September 30, 2022 04:28 PM | Nick Dey
Stocks Drop as Inflation Jumps, Earnings Disappoint

Stocks tumbled this week as mixed economic data, hawkish Fedspeak, and tax breaks for Britons all played a part in providing bearish headlines.

Newly appointed U.K. Prime Minister Liz Truss announced a stimulus package that tanked the Pound and raised gilt yields. The stimulus package is a trickle-down tax break, aiming to freeze corporate taxes, drop payroll taxes, cut the highest tax bracket, and subsidize energy bills.

While tax cuts offer short-term bumps in spending activity, the long-term effects are likely the opposite. FocusEconomics reported that the tax cuts "will increase the public debt, widen the budget deficit, stoke core inflation and weigh on the pound.”

There are plenty of studies that refute such cuts, noting that the only difference in the five years following the tax cuts is how fast wealth accumulated at the top and how wide the gap between the wealthy and poor got. Per-capita GDP and unemployment were nearly identical during that five-year period.

Besides news from across the pond, there were several economic reports worth mentioning and some interesting earnings reports.

PCE Prices

The biggest report this week was the Personal Consumption Expenditures Price Index report. Prices rose at a faster rate than expected, as the headline figure jumped 0.3% and the core figure jumped 0.6%. The headline figure moderated on a year-over-year basis to 6.4%, while the core figure accelerated to 5.0%.

The big takeaway here is that core figure as it excludes the more volatile prices, being food and energy. This is likely to strengthen the Fed’s case for hawkish rate hikes as these are the prices the Fed has the most influence on.

“Gasoline and other energy goods” were the leading contributors to the decrease. With core prices rising, underlying inflation showed renewed persistence in August.

New Home Sales

New home sales came in better than expected as buyers rushed to purchase homes while rates dipped in August. There were two takeaways from this report.

First, while the report’s upside was very large, the jump is unsustainable. New home sales surged to an annualized rate of 685,000 units, against estimates for sales to dip to 500,000 homes.

Second, while the jump is likely an aberration since rates are expected to continue higher, inventory dropped to 8.1 months from 10.4 months in July. This was a healthy step for new home sales towards being a “balanced market” which is defined as five to seven months of inventory.

Stock News

Earnings reports and individual headlines were light this week but certainly had some influential and notable ones.

The most promising update this week came from Biogen (BIIB). The company announced positive Phase 3 trial data for its Alzheimer’s Disease treatment, lecanemab. The treatment reduced cognitive and functional decline by 27% compared to the placebo. The FDA will vote on whether it will approve lecanemab come January 2, 2023.

The less promising news came earnings this week, which is something we expect to see more of.

Nike’s (NKE) earnings failed to inspire much confidence as it plunged 12% Friday following the report. Nike’s inventory swelled 44%, which depressed margins and investors. The company plans to aggressively offload its excess inventory via discounted prices to out-of-season clothing.

Also disappointing investors this week was CarMax (KMX), which showed a 54% hit to its earnings as same-store used unit sales fell 8.3%. CarMax updated in late June that it was trending towards a low-single-digit decline in comp sales, but that quickly accelerated to a mid-teen decline in comps.

All told, stocks fell this week. The S&P 500 fell 2.65% and Dow fell 2.66%. Meanwhile, the Nasdaq dropped 2.40% and the Russell 2000 slipped 0.49%.

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