Second Half Scaries | The Daily Peel | 7/1/22

Market Snapshot

On this last day of June, futures pointed sharply lower. Yesterday rounded out a rough first six months for most markets of all kinds. It was actually the worst start to a calendar year for the Nasdaq in its history, and the S&P and Dow haven’t been this abused in the first six months of the year in 50 years.

At the closing bell, the Dow was down 0.82%, the Nasdaq lost 1.33%, and the S&P dumped 0.88%.

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Let’s get into it.

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What's Ripe

Northrop Grumman ($NOC) — Well, as the war in Ukraine rages on, so does our unquenchable thirst for sending aid. As we said about six weeks ago, Defense stonks might be a solid place to park some money in this down market.

Analysts have argued that $NOC is a nice buy at current levels. Yesterday, shares climbed 3.60%.

Costco ($COST) — Shares of the big box membership-required megaretailer had a decent first few months of the year, and then May rolled around. Weak guidance and a softening consumer have really hurt the retailer since.

Shares of $COST gained ground yesterday, rebounding another 2.01% on a down day for most of the market.

What's Rotten

Walgreens Boots Alliance ($WBA) — Here’s another case of the numbers not telling the whole story. Shares of $WBA declined yesterday, even after the company reported revenues and EPS numbers that beat analysts’ estimates.

Inflation is eating away the money in your wallet, and Walgreen’s guidance reflects this sentiment. Shares of $WBA lost 7.27% yesterday.

Banks ($JPM, $GS) — Kind of hard to watch some of these big boys lose money in a rising rates financial environment. As we’ve been saying, typically, these types of banks make more money as rates go up.

However, as deal flow slows, some of the big investment banks tend to have this component of their business slow down. Yesterday, $JPM was down 2.33%, and $GS lost 2.06%.

Thought Banana

3Q Scaries — A lot has changed in the last six months.

My pandemic diet continues even after a Tonal subscription and bringing in a Peloton, but I’m not just talking about my waistline.

The most profitable trade this calendar year has been the energy trade. NatGas is trading near all-time highs, more than doubling in value. In December 2021, if you had invested in NatGas futures at $3.76 per million Btu, that investment would now be over $8 if you can believe it.

Most NatGas consumer-facing suppliers update their prices seasonally, so this hasn’t been completely passed to the public just yet. You wait; this winter’s heating costs are going to be through the roof. If you’re in Europe, it’ll be even worse, as you’re probably kicking the tires on the ole “clean coal” plants to keep warm.

Oil is in a similar boat. In barrel terms, WTI Crude went from $76.99 on the first of the year to above $120 and is now trading near $110. This is almost a 50% increase. Like clockwork, the $XLE ETF has climbed higher, gaining almost 30% in the same time period.

The price of gas is probably my favorite headline. In January, the average price was $3.41 a gallon. It also “gained” 50%, but it turns out that these aren’t the gains you want to see for your portfolio or in the gym.

Our big loser for the year so far is clearly the Nasdaq. If you’ve been following the news, you’ve seen excessive valuation compression for unhealthy companies and significant compression for some of the great ones. No one in between was safe from this haircut.

The Q’s ($QQQ) is down something like 30% YTD. If you’re more into $SPY or $DIA and you’re only down 20% or 15%, respectively, you’re probably somewhat happy. At the end of the day, things could be worse.

What once were considered mega-cap tech growth names have become mega-value names. Growth for the sake of growth has died on the vine, and software-as-a-service has fallen from grace in today’s market.

Can these trends continue in the third quarter? Well, I don’t give financial advice, but I don’t think we are out of the woods just yet.

I always joke about the Sunday Scaries; it’s one of my favorite millennial concepts. But right now, I have the third quarter scaries. I’m excited to kick off another quarter, but I’m nervous for the roller coaster to come.

Wise Investor Says