Should You Be Buying What Robinhood Is Selling? | Sidnaz Blog

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In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favor by taking roughly half your money and lighting it on fire instead.

Just as Robinhood isn’t the first brokerage to offer commission-free trading, it isn’t the first to seek to “democratize” investing or to sell a piece of itself to its own customers.

On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.

Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”

Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.

Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.

For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.

In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.

Here in 2021, Robinhood’s offering is one of several trading and investing IPOs:

Coinbase Global Inc.,

the cryptocurrency exchange, went public in April, and

Acorns Grow Inc.,

which helps users invest in tiny increments, said in May that it expects to go public later in the year. Since its Apr. 14 debut, Coinbase is down about 27%. Robinhood fell 8% on its first day of trading Thursday.

One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.

Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.

In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.

Unlike Merrill, which was rescued from the brink of failure in 2008 when

Bank of America Corp.

bought the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.

However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.

Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.

How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.

Every once in a while, outside investors in a brokerage IPO do well.

Goldman Sachs Group Inc.

began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.

Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.

That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.

That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”

On average, IPOs have severely underperformed seasoned stocks in the long run. And, history suggests, brokerages doing IPOs are better at timing the market for themselves than for you.

Write to Jason Zweig at [email protected]

More from The Intelligent Investor

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

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Amazon’s New Day Has a Rough Start | Sidnaz Blog

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The results create a bit more of a challenging setup for new CEO Andy Jassy.



Photo:

Patrick Fallon/Zuma Press

OK, so maybe

Jeff Bezos

isn’t quite going out on top.

The final quarter for

Amazon.com


AMZN -0.84%

under the direct management of its famous founder turned out to be a bit of a letdown. Revenue and operating income for the second quarter both fell shy of Wall Street’s estimates, as did the high end of the company’s revenue forecast for the current quarter. It was the first time the e-commerce titan missed the high end of its own sales projections in two years, according to data from FactSet.

Amazon’s


AMZN -0.84%

shares fell more than 7% following the results.

The company is still a juggernaut. Second-quarter revenue rose 27% to $113.1 billion, bringing trailing 12-month sales to more than $443 billion. That puts Amazon well on pace to overtake

Walmart

as the largest U.S. company by annual sales some time next year, while still growing at double-digit rates. Growth at the company’s crucial AWS cloud business also picked up, with revenue jumping 37% year over year compared with a 32% rise in the last quarter. That lines up with trends shown by cloud rivals

Microsoft

and Google earlier this week, suggesting that the market leader, AWS, is at least holding its ground.

But the boom in online sales Amazon enjoyed at the start of the pandemic created a challenging comparison for the most recent quarter. Thursday’s results confirmed the suspicions of some analysts that the company’s Prime Day sales event in late June underwhelmed. Amazon’s online stores segment saw revenue grow by only 16% to $53.2 billion in the second quarter, falling well short of analysts’ targets. Revenue growth from third-party and subscription services decelerated. Advertising revenue, reflected in the company’s “Other” segment, showed a strong jump of 87% year over year to $7.9 billion. But advertising still contributes only about 7% to Amazon’s total revenue.

The results create a bit more of a challenging setup for new CEO

Andy Jassy

as Amazon will face difficult comparisons for the rest of the year following its pandemic-fueled sales jump in 2020. But the bar seems low enough. The midpoint of the company’s revenue projection for the third quarter represents growth of 13% year over year. That would be Amazon’s slowest growth rate in 20 years, even with the pandemic picking back up and possibly driving more sales online.

Amazon’s new boss has plenty to do.

Write to Dan Gallagher at [email protected]

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Pinterest Shares Fall as U.S. Monthly Average Users Decline | Sidnaz Blog

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Pinterest reported Thursday second-quarter net income of $69.4 million, compared with a loss of $100.7 million a year earlier.



Photo:

Gabby Jones/Bloomberg News

Shares of

Pinterest Inc.


PINS -6.01%

fell more than 14% in after-hours trading, as the online sharing platform said its monthly average users in the U.S. contracted during the quarter, a trend that accelerated this month.

The company reported 91 million monthly average users in the U.S. in the quarter, down 5% from a year earlier. Pinterest said that “engagement headwinds” continued this month, with monthly average users down 7% as of July 27. Globally, monthly average users increased 9% in the quarter.

“Our second quarter results reflect both the strength of our business and the recent shift in consumer behavior we’ve seen as people spend less time at home,” Chief Executive

Ben Silbermann

said in prepared remarks.

Pinterest saw its user growth soar during the pandemic, as shut-in consumers turned to the website for masks and other products. The company has said the pandemic may have pulled forward some user growth.

The company also reported Thursday second-quarter net income of $69.4 million, compared with a loss of $100.7 million a year earlier.

Adjusted earnings were 25 cents a share. Analysts polled by FactSet were expecting adjusted earnings 13 cents a share.

Revenue totaled $613.2 million, compared with $272.5 million a year earlier. Analysts expected $562 million in revenue.

Pinterest shares closed Thursday at $72.04 apiece, down 6%. So far this year, the stock is up 9.32%.

Write to Robert Barba at [email protected]

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Smaller but More Frequent Catastrophes Loom Over Insurance Sector | Sidnaz Blog

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Less devastating than mega events such as earthquakes and hurricanes, these secondary perils, as they are known in the industry, happen relatively frequently and include hail, drought, wildfire, snow, flash floods and landslides.

Climate change and urban sprawl are driving a jump in secondary perils losses, said Tamara Soyka, Head Cat Perils EMEA at

Swiss Re.

Insurers and reinsurers, who traditionally focused on predicting big weather events that can cause widespread damage, are increasingly incorporating secondary-peril models.

Swiss Re, for instance, last year started considering pluvial—that is, heavy rainfall, similar to the recent European floods—flood zones when assessing risks.

A storm system over Europe dumped heavy rains in recent weeks, causing heavy floods in Germany, Belgium and parts of the Netherlands and Switzerland. The German Insurance Association on Wednesday said it expects insured losses could hit nearly $6 billion as a result of the flooding in North Rhine-Westphalia and Rhineland-Palatinate. It doesn’t yet have estimates for the damage in Saxony and Bavaria.

Before-and-after images show the extent of damage in German towns hit by the region’s worst flooding in decades. Visiting one inundated village, German Chancellor Angela Merkel called for more effort to combat future climate-related disasters. Photo: Satellite Image ©2021 Maxar Technologies

This year is expected to be the most damaging for the country since 2002, when insured storm damage totaled about €11 billion, equivalent to $12.98 billion, the association said. While mostly all residential buildings have windstorm and hail coverage, only 46% of homeowners have cover for heavy rain and floods.

Heavy rain, hailstorms and wind in Germany and Switzerland in June have already cost the industry an estimated $4.5 billion, according to analysts at Berenberg.

Analysts at

Moody’s Investors Service

in a note this week said German insurers “may find it challenging to protect homeowners against climate risk without significant price increases.”

Insurers paid out $81 billion for damages related to natural catastrophes in 2020, according to reinsurance giant Swiss Re, up 50% from 2019 and comfortably topping the $74 billion 10-year average for such losses.

Secondary peril events accounted for more than 70% of the $81 billion in natural catastrophe losses last year, according to the data.

Firms expected to take hits to their earnings from the European floods include Swiss Re,

Munich Re AG

and

Zurich Insurance Group,

according to analysts. Spokespeople for Swiss Re, Zurich and Munich Re declined to give estimates of the potential impact.

UBS Group AG analysts project $6 billion worth of losses for the industry, split into $2 billion for primary insurers and $4 billion for reinsurers.

SHARE YOUR THOUGHTS

Have you been affected by a natural disaster? What was your experience working with insurance companies? Join the conversation below.

The prospect of more intense weather has insurers rapidly updating their risk-assessment models and recalculating the price of insurance. Property insurers faced an estimated $18 billion bill for damage to homes and businesses from the long stretch of frigid weather in Texas and numerous other states, the equivalent of a major hurricane, The Wall Street Journal reported earlier this year.

In some cases, the increased frequency of extreme weather events can lead insurers to drop coverage altogether. Some insurers in California chose to not renew insurance policies for homeowners in high-risk areas for wildfires, the Journal reported in 2019. California wildfires the prior two years had killed dozens of people and racked up more than $24 billion in insured losses.

Analysts say the losses from the European flooding will be manageable for the industry. While they may dent quarterly or yearly earnings, they won’t have a seismic effect on their capital. If the coming U.S. hurricane season is a normal one, that will likely crimp earnings further for some.

Flooding in Altenahr, Germany. In some cases, the increased frequency of extreme weather events can lead insurers to drop coverage altogether.



Photo:

friedemann vogel/Shutterstock

The Euro Stoxx Insurance index is up 7.6% this year, trailing the broad Euro Stoxx 600 stock-market index, which is up nearly 15%. The insurance index has fallen 6.4% since March 30, which Berenberg analysts attribute to fears of potential dividend cuts due to recent natural catastrophes.

The costs of reinsurance in Asia and the U.S. went up over the past couple of years owing to hurricanes and wildfires, said Berenberg analyst Michael Huttner. But prices in Europe didn’t increase significantly over that period. The floods will likely help catastrophe pricing increase, said Mr. Huttner.

Will Hardcastle, an analyst at UBS, says this year is shaping up to be the fifth consecutive year that natural catastrophe losses will be above reinsurers’ budgeted level.

“The last five years would suggest you’re not getting appropriate pricing for it,” he said. “It’s always difficult to determine whether the trend is short term. Now at this point you have to be thinking it’s more structural” because of climate change, he said.

Write to Julie Steinberg at [email protected]

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Unilever Gives a Preview of Worsening Inflation Pinch | Sidnaz Blog

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Inflation is becoming as much a headache for CEOs of household-staples companies like

Unilever


UL -0.19%

as for shoppers. Their ability to pass on price increases hinges on where and what they sell.

The U.K.-based maker of Hellman’s mayonnaise and Ben & Jerry’s ice-cream said Thursday that sales increased at a healthy 5% clip in the three months through June, compared with the same period of 2020. Some products that saw demand slump during lockdowns, such as deodorant, have returned to growth now that social restrictions are being lifted in certain countries.

However, Unilever’s shares fell 5% in early London trading because of new profit guidance. Operating margins are expected to be flat in 2021, down from the slight increase that Chief Executive Officer

Alan Jope

was targeting just three months ago.

Inflation is the clear culprit. For Unilever and its main European peer Nestlé, costs of goods sold amount to around half of revenue. Bernstein recently estimated that over the next 12 months these two companies face roughly 14% increases in bills for everything from plastic packaging to food commodities. On a call with analysts, Unilever’s finance director said that costs spiked again in the latest quarter. Soybean oil prices, an important ingredient for the company’s salad dressing, jumped 20% compared with the first quarter.

Predicting who has the best ability to pass on these higher prices to consumers isn’t easy, but investors can look for clues in market-share data, as well as companies’ mix of products and countries.

Unilever, the maker of Dove soap, said costs spiked again in the latest quarter.



Photo:

Jason Alden/BLOOMBERG NEWS

Even though consumers have less disposable income on average, it is easier to increase prices in emerging markets than in mature economies. This is because supermarkets in developing countries often have less bargaining power than in Europe and the U.S., where grocers are more consolidated. Unilever’s high exposure to emerging markets, which contribute roughly 60% of group sales, is positive. However, it can only push so far before pinched shoppers trade down to cheaper brands. This is already happening in Indonesia.

The company and its main rivals will have to fight harder in Europe, where price negotiations between consumer-staples companies and supermarkets are notoriously fraught. In certain markets like France, the prices of some goods are in deflation.

This week’s controversy over Ben & Jerry’s decision to stop selling ice cream in Israeli settlements may not help the task. The move taken by the brand’s independent board could cause problems for Unilever in the U.S., where it has spent years trying to improve its competitive position. Any slip in consumer demand will make it harder to increase prices.

Lastly, the split of luxury and mass-market brands in consumer companies’ portfolios will determine how much they can shield margins. It is easier to raise prices for premium products, such as Unilever’s posh cleaning brand The Laundress, than for mundane brands where shopper loyalty is weaker.

Consumer bosses face a delicate balancing act to get through this year with both their margins and market share still intact.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s. WSJ’s Jon Hilsenrath looks at what consumers can expect next.

Write to Carol Ryan at [email protected]

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Stock Futures Rise Ahead of Earnings, Jobless Data | Sidnaz Blog

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U.S. stock futures ticked higher ahead of a flurry of earnings reports and jobless figures that are expected to reach a fresh pandemic low.

S&P 500 futures gained 0.2% and Dow Jones Industrial Average futures strengthened 0.2%. Changes in futures don’t necessarily predict moves after the opening bell.

European stocks climbed Thursday for a three-day winning streak. The Stoxx Europe 600 added 0.5% in morning trade. Energy and utilities sectors led gains while consumer staples and healthcare sectors lost ground.

Unilever

slipped 3.4% as it posted its fourth consecutive session of declines.

The U.K.’s FTSE 100 rose 0.1%. Other stock indexes in Europe also mostly climbed as France’s CAC 40 gained 0.5%, the U.K.’s FTSE 250 added 0.6% and Germany’s DAX rose 0.7%.

The Swiss franc and the British pound were up 0.1% and 0.3% respectively against the U.S. dollar and the euro was flat against the U.S. dollar, with 1 euro buying $1.18.

In commodities, international benchmark Brent crude fell 0.1% to $72.16 a barrel. Gold was flat, at $1,802.60 a troy ounce.

German 10-year bund yields were down to minus 0.399% and 10-year U.K. government debt known as gilts yields were down to 0.592%. The yield on 10-year U.S. Treasury fell to 1.270% from 1.279%. Yields move in the opposite direction from prices.

Indexes in Asia gained as Hong Kong’s Hang Seng climbed 1.6% and China’s benchmark Shanghai Composite rose 0.3%.

Traders gathered for the IPO of VTEX at the New York Stock Exchange on Wednesday.



Photo:

brendan mcdermid/Reuters

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Netflix May Find No Business Like Show Business | Sidnaz Blog

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Anya Taylor-Joy and Thomas Brodie-Sangster in a scene from ’The Queen’s Gambit.’



Photo:

/Associated Press

It is as good a time as any for

Netflix

to test a new story line. Even a lucky turn in videogames won’t free the streaming giant from the need to keep playing Hollywood’s game, though.

Netflix used its second-quarter report Tuesday afternoon to confirm previously reported plans to enter the videogame business. No timing was given, though the company said the offerings would be included in its current subscription plans at no additional cost. The company isn’t backing away from its work on movies and TV shows, but said in its letter to shareholders “since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games.”

That news comes as Netflix remains mired in somewhat of a post-pandemic slump. It added 1.5 million net new paying subscribers in the second quarter, which was a bit better than it had forecast but still its lowest level of growth in nearly a decade. It also projected 3.5 million net adds for the third quarter—about 29% less than what Wall Street was hoping for. That would bring the total number of new subscribers to about nine million for the first nine months of 2021. Netflix added more than 28 million paying subscribers in the same period last year.

A foray into games might make sense for a company with an intimate knowledge of the viewing habits of a user base that now numbers over 209 million. It is also a tough business to crack—even the mobile gaming market that Netflix says it expects to target initially. There are many participants, but most of the money is still made by long-established properties. Games like “Candy Crush” and “Clash of Clans” remain in the top-five grossing charts even after nearly a decade on the market.

Netflix will need to keep battling it out for video streaming eyeballs. The company expects its pace of new releases to pick up in the second half of this year; analysts from Wedbush count 42 original shows and movies expected for the third quarter alone. But the company still has its own track record to compete with: Last fall included popular shows such as “The Queen’s Gambit,” “The Crown” and “Bridgerton.” Netflix shares are down nearly 2% this year, lagging behind many internet and entertainment peers. Streaming investors hyper-focused on subscriber growth aren’t playing games.

Write to Dan Gallagher at [email protected]

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

Appeared in the July 21, 2021, print edition.

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UBS Profit Jumps on Wealth Management Boom | Sidnaz Blog

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A pedestrian passes a UBS branch in Zurich earlier this month.



Photo:

Stefan Wermuth/Bloomberg News

UBS Group AG


UBS -2.22%

posted better-than-expected second-quarter earnings from strong client activity in the world’s buoyant markets.

On Tuesday, Switzerland’s biggest bank said net profit jumped to $2 billion from $1.23 billion a year earlier, outpacing analyst expectations of $1.34 billion. It said wealth clients traded more, pushing transaction revenues 16% higher from a year earlier, and added that recurring fees were 30% higher on their existing trades and products.

At UBS’s investment bank, deal advice for mergers and acquisitions and other corporate transactions pushed global banking revenue 68% higher, helping to offset a 14% decline in market-trading income.

UBS said markets revenue would have been flat but it took an additional $87 million hit the quarter from the late March default by family office Archegos Capital Management. UBS was one of about a half-dozen banks that lent to Archegos to take large, concentrated positions in stocks. The Swiss bank said in April that it had lost $861 million when exiting the trades, most of it booked in the first quarter.

UBS helps the world’s rich manage their wealth and competes with Wall Street banks in investment banking.

On Tuesday, Chief Executive

Ralph Hamers

said wealth clients are investing more with the bank in private markets and in separately managed accounts, adding that they are also freeing up liquidity as a buffer against unforeseen events by refinancing assets and borrowing from the bank.

He said momentum is on UBS’s side and that its strategic choices are paying off. The bank refocused around wealth management a decade ago and pared back its investment bank. It has been less in the limelight than its smaller domestic rival,

Credit Suisse

Group AG, which lost more than $5 billion from the Archegos affair this year.

Write to Margot Patrick at [email protected]

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How Jitters About the Global Economy Are Rippling Through Markets | Sidnaz Blog

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Stocks, bond yields and oil prices declined Monday in the most acute sign yet that investors are second-guessing the strength of the global economic recovery that sent markets soaring this year.

Markets rallied in the first half of 2021, thanks to investors’ bets that economies would bounce back, as countries rolled out Covid-19 vaccinations and lifted restrictions on businesses. Reports on everything from retail sales and housing prices to employment have shown swaths of the U.S. economy healing, helping send the S&P 500 to 39 record closes this year and almost double from its March 2020 trough.

Monday’s pullback put a dent in that narrative. The Dow Jones Industrial Average fell 725.81 points, or 2.1%, to 33962.04, logging its steepest decline since October. Meanwhile, the yield on the 10-year U.S. Treasury note, which falls as bond prices rise, sank to its lowest level since February. And U.S. crude oil prices slid 7.5%—marking their worst session since September.

Behind the rout, investors say, is a growing list of concerns about the recovery. The Delta coronavirus variant has spread rapidly, reigniting the debate in several countries about whether governments should resume lockdowns and curb activity. Meanwhile, inflation has accelerated faster than many anticipated, and strained U.S.-China relations have put pressure on trillions of dollars’ worth of U.S.-listed Chinese companies.

Many money managers believe the global economy will be able to keep growing. They just don’t know how quickly—and whether the gains will be enough to keep increasingly pricey-looking markets rising after a banner first half.

“The market is saying the economy is going to slow down fairly significantly in the next weeks or months,” said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management.

Peak Growth?

Investors say much of what drove markets’ reversals on Monday is concern that the best of the economic recovery may be in the rearview mirror.

The 2020 recession in the U.S. lasted just two months—the shortest on record, according to the National Bureau of Economic Research. The economy powered higher in the year that followed.

Gross domestic product grew at a 6.4% seasonally adjusted annual rate in January through March, leaving the U.S. within 1% of its peak reached in late 2019.

Economists surveyed by the Journal estimate that the economy expanded at a 9.1% seasonally adjusted annual rate in the April-to-June period, the second-fastest pace since 1983. Corporate earnings are also poised to soar. Analysts are projecting profits for S&P 500 companies to rise almost 70% in the second quarter from a year earlier, a growth rate that would be the highest in more than a decade.

Now, some investors are asking: Is this as good as it gets?

Economists believe the pace of U.S. growth this year likely peaked in the spring and will moderate to 6.9% for 2021 as a whole before cooling to 3.2% next year and 2.3% in 2023. These dwindling expectations have stoked big moves among stocks and sectors within the S&P 500 as well as across the bond market.

“That’s what the market has been doing…starting to digest peak growth rates and realizing these growth rates are unsustainable,” said

John Porter,

chief investment officer of equities at Mellon Investments Corp.

Elsewhere around the world, growth also looks poised to slow—potentially pointing to further challenges for investors. The S&P 500 has continued to outperform the Stoxx Europe 600 and Shanghai Composite for the year. However, some investors wonder if the gap between U.S. and overseas indexes will narrow, if the recovery in the U.S. begins to stall more.

Oil Prices Tumble

One area of the markets where fear about growth quickly reared its head: the oil market.

For months, investors had piled into bullish bets on oil, assuming that demand would boom and the economy would stage a robust recovery. Many of those wagers have been unwound in recent sessions. Monday’s declines were driven by fears about the Delta variant halting travel and crimping demand for fuel.

Shares of energy producers, which tend to be sensitive to changes in the economic outlook, also pulled back. The S&P 500’s energy sector is now down 13% this month, the worst-performing group within the index.

Investors say much of what drove markets’ reversals on Monday is concern that the best of the economic recovery may be in the rearview mirror.



Photo:

Richard Drew/Associated Press

Sentiment Stalls

For months, people around the U.S. opened their wallets and spent on everything from cars to travel. Investors grew more optimistic about the economy, as Americans got vaccinated, businesses reopened and many people found themselves flush with cash, helped in part by stimulus checks. One survey by Gallup showed that the percentage of Americans who considered themselves to be “thriving” in life reached 59.2% in June, the highest in more than 13 years.

Recently, signs have emerged that this optimism is starting to fade. Fresh data last week showed that consumers stepped up spending in June. However, new figures also showed that consumer sentiment in the U.S. declined in early July, missing expectations from economists polled by The Wall Street Journal. Meanwhile, the unemployment rate has stagnated, and some investors are now concerned about a labor shortage snarling the economy.

One of the biggest factors weighing on sentiment? Inflation. Consumer complaints about rising prices on homes, vehicles and household durables reached a record, particularly hitting lower and middle-income households. The Labor Department said its consumer-price index rose 5.4% in June from a year ago, the fastest 12-month pace since August 2008.

Because consumer spending drives much of U.S. economic growth, investors tend to heed signs that households are beginning to become more wary about major purchases. Inflation can also eat into corporate profits, making stocks look less attractive.

According to a recent Charles Schwab survey, 15% of all U.S. stock market investors said they first began investing in 2020. Picking a stock, however, may not be as easy as it sounds. WSJ’s Aaron Back explains the factors at work when stock-picking. Photo illustration: Rafael Garcia

“Last week we had high inflation readings. Now we have concerns that the rise in Covid cases is dimming the economic outlook. High inflation and lower economic growth is not a good combination,” said

Dave Donabedian,

chief investment officer of CIBC Private Wealth Management, U.S., in emailed comments.

The Bond Market’s Warning

Even before Monday, bets that economic growth will cool rippled across the bond market. Investors have been gobbling up government bonds for weeks.

One effect of the slide in bond yields? The real yield on the 10-year Treasury note has been negative, and on Monday it slipped to 1.05%, the lowest since February. Real yields are what investors get on U.S. government bonds after adjusting for inflation. When those bond yields are negative, as they have been lately, investors are effectively locking in losses when parking their money in government bonds.

“People are worried about inflation but also a growth scare,” said

Giorgio Caputo,

a portfolio manager at J O Hambro Capital Management. “You’ve never had a modern economy that’s reopened after a pandemic.”

These fears have driven investors into government bonds and helped push those real yields lower and lower, he said.

While a souring outlook for growth is generally negative for stocks as a whole, one area of the market has actually benefited from negative real yields. Lower yields weigh on the discount rate in formulas used to estimate what stock prices should be, making future corporate earnings more valuable. The recent drop in yields has boosted shares of technology companies and other fast-growing firms and helped drive a mammoth shift in the stock market in recent weeks. Tech behemoths like

Apple Inc.,

Amazon.com Inc.

and

Microsoft Corp.

have risen to fresh highs, even as many other parts of the market have floundered.

And on Monday, the tech-heavy Nasdaq Composite outperformed its peers. Many investors returned to the bets that had flourished when people around the country were stuck at home during the Covid-19 pandemic.

Peloton Interactive Inc.

shares jumped 7.1%, while

Slack Technologies Inc.

added 1%.

Wayfair Inc.

shares advanced 3.3%.

In contrast, shares of cyclical companies that benefit from a speedier economic recovery—like banks, energy companies and airlines—were among the worst-performers in the stock market.

“It seems like the market overextrapolated the good times…and now we’re seeing a little bit of the air being let out,” said

Jason Pride,

chief investment officer of private wealth at Glenmede.

Covid-19 Weighs on Investors

More WSJ coverage of markets, selected by the editors

Write to Gunjan Banerji at [email protected] and Akane Otani at [email protected]

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Nvidia Stock’s Surge Makes Chip Maker 10th-Biggest U.S. Listed | Sidnaz Blog

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Nvidia chips’ parallel-computing capabilities make them better than rivals’ for artificial-intelligence performance and mining cryptocurrencies.



Photo:

nvidia corp/Reuters

The post-pandemic boom in the semiconductor business has powered

Nvidia Corp.


NVDA -4.25%

into the top 10 U.S. public companies, joining the likes of Apple Inc. and JPMorgan Chase & Co.

Shares of the Santa Clara, Calif., firm have risen nearly 80% over the past year, giving it a market value of around $453 billion. That is more than rivals

Intel Corp.

and

Broadcom Inc.

combined.

Nvidia makes processors that power gaming and cryptocurrency mining. Chip shares have risen in part thanks to a pandemic-induced global shortage of semiconductors that has driven up the prices of everything from laptops to automobiles.

One reason for Nvidia’s outperformance, analysts say, is that its chips’ parallel-computing capabilities make them better than rivals’ for artificial-intelligence performance and mining cryptocurrencies. Nvidia’s graphics processors are used for mining ethereum and the cryptocurrency’s value has soared this year, even after a recent correction.

That surge has exacerbated the shortage of gaming chips. Nvidia plans to sell cards aimed at the crypto market and has employed technical adjustments to make gaming processors less useful to miners. Analysts also expect Nvidia to get a boost from tech and autonomous-vehicle companies using its chips to navigate traffic or track online behavior.

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“The company is the biggest and best supplier of parallel computing,” said

Ambrish Srivastava,

analyst at BMO Capital Markets. “It’s hard to compete against that.”

While Nvidia has a leg up in the data-center industry, competitors are catching up, analysts said. The recent slide in crypto also could spur miners to dump their chips on the secondary market, as happened when a previous ethereum skid hit revenue in 2018.

A global chip shortage is affecting how quickly we can drive a car off the lot or buy a new laptop. WSJ visits a fabrication plant in Singapore to see the complex process of chip making and how one manufacturer is trying to overcome the shortage. Photo: Edwin Cheng for The Wall Street Journal

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