Stock futures are rising, with technology shares on track to lead gains ahead of a policy decision from the Federal Reserve. Here’s what we’re watching in Wednesday’s trading:
shares fell 14% premarket after the cloud security firm issued guidance below expectations for the current quarter and lowered its annual outlook as supply-chain issues crimp its ability to meet demand.
named a new chief executive officer and made changes to its board Tuesday, moves that will allow the railroad operator to avert a proxy fight. Investors were quiet; the stock was flat premarket.
edged down 0.1% after the financial services company said profit fell in the fourth quarter, but beat analysts’ consensus projections, as revenue increased due to strong credit results.
are among the companies reporting earnings after the close.
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Global stocks, oil and cryptocurrencies fell, as investors grappled with the prospect of higher interest rates and disappointing results from popular consumer tech stocks.
Futures tied to the S&P 500 fell 0.4%, pointing to an extension of Thursday’s drop, when the index closed down 1.1%. Nasdaq-100 futures declined 0.7%, suggesting more losses for technology stocks. Dow Jones Industrial Average futures ticked down 0.1%.
Shares in Asia-Pacific and Europe broadly retreated. The pan-continental Stoxx Europe 600 fell 1.2%, while China’s Shanghai Composite Index and Japan’s Nikkei 225 declined 0.9%.
“As we return to a more normal world, names like Peloton and Netflix being weaker or disappointing isn’t a surprise,” said Arun Sai, a multiasset strategist at Pictet Asset Management. “I think when the dust settles, we’ll have a reasonable set of numbers in Q4 earnings. Peloton and Netflix are more of a distraction than anything else.”
This has hit growth stocks and put the Nasdaq in correction territory, as investors are dumping shares of unprofitable companies. Tensions between Russia and NATO are also weighing on market sentiment, investors said. The S&P 500 is down 3.9% this week, on track for the worst performance since Oct. 2020.
“Geopolitical risk plays a role, repricing of [central bank] policy plays a role and the inflation mix in the sense of cost pressures. You put all those together and there is actually quite a change,” said Georgina Taylor, a multiasset fund manager at Invesco. “Risk premium for equities needs to go up.”
President Biden said on Wednesday that the U.S. is ready to unleash sanctions against Russia if President Vladimir Putin makes a move against Ukraine. Biden also laid out a possible diplomatic resolution. Photo: Susan Walsh/Associated Press
Investors’ bets on faster rate rises have driven up inflation-linked bond yields, seen as a benchmark for financing costs. The yield on the 10-year Treasury inflation-protected security rose as high as minus 0.526% Friday, the highest level since June 2020, before easing slightly to minus 0.536%. The yield on the benchmark 10-year Treasury note edged down to 1.792% from 1.833% Thursday.
Cryptocurrencies tumbled, with bitcoin losing nearly 6.5% compared with its level at 5 p.m. ET Thursday. It traded below $38,300, the lowest level since August, before rising slightly to around $38,700. Ether fell 6.8%.
Oil prices also declined. Global benchmark Brent crude fell 1.5%, trading at $87.03 a barrel, weighed down by a surprise increase in U.S. crude stockpiles, according to analysts at RBC Capital Markets.
fell 10% after it posted an operating loss and lowered its guidance, citing supply-chain constraints. Shares of some Chinese drugmakers surged after they were selected to help make cheaper versions of Merck’s Covid-19 pill.
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.
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
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
and Google earlier this week, suggesting that the market leader, AWS, is at least holding its ground.
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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.
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%.
Though it feels like we’ve been Zooming and FaceTiming and using Google Hangouts for an eternity, most of us have still not figured out how to look good on a video call. Luckily, a new feature on iPad Pro called Center Stage has launched, and without much effort, it can make you look just a little bit better on camera.
Center Stage only works on the ultra-wide front-facing cameras on the iPad Pro, and seeks to keep you in focus even as you move around the frame. That means if you have your iPad Pro propped up, the camera will follow you around, and automatically keep refocusing even as you move closer, further away, or to the side.
To activate Center Stage for FaceTime, open up “Settings” and tap “FaceTime.” Make sure the Center Stage switch is toggled on (just toggle it back off if/when you want to disable it). If you’re already on a FaceTime call, you can swipe up from the bottom of the screen and toggle on or off from the menu that arises.
If you are not a regular user of Apple’s proprietary video calling app, they’ve also allowed the feature to be enabled on other video calling platforms, including Zoom. While on a Zoom call on an iPad Pro, you’ll see the option to turn Center Stage on or off on the left-hand sidebar, just below the options to switch your camera and active speaker view.
Now you can at least trust that your face will be in focus and in the frame, even if you move around. Exactly how your face looks (and what you are wearing or not wearing just out of view of the camera) is still entirely up to you.
Virtual reality headsets have come a long way since the first time I saw a VR “arcade” pop up in a mall in the 1990s. (I never played, although I was curious; five bucks a game was like a whole week’s allowance.) Now you can strap on a headset and walk around your living room, with options ranging from dancing games to fitness-centered apps, so I’m setting out to learn: how good a workout can you get in virtual reality?
What can a VR headset do, anyway?
I’m trying out the Oculus Quest 2, a device that plays games on its own without needing to be connected to a computer. You wear the goggle-like headset and grasp two controllers, and the games ask you to move your hands to do things.
In most VR fitness apps, you don’t need to press buttons on the controllers, you just wave your hands around. Since the game is also aware of where your headset is in space, it can ask you to squat or to lean to the side. The games don’t differ too much in the types of actions they ask you to do, but they vary greatly in the kind of environment you are immersed in while you do it.
How to set up your VR workout space
While a virtual world can be as big as the game’s developer wants it to be, your living room is still only the size of you living room. The games have to let you move around while stopping you from actually running into a wall or smacking your hands into your bookshelves, so there’s a system that sets virtual boundaries.
With Oculus, the boundary is called your Guardian. (Vive, another popular VR headset, calls it a Chaperone.) When it was time to set up the Guardian, the virtual world faded away and I found myself looking at my actual surroundings in grainy black-and-white. My couch, the walls, and everything else was visible for this step, and the device told me to use my hand controllers to draw a line on the floor to define my safe space. (The motion is similar to spraying a jet of water with a garden hose.)
The minimum recommended size for “roomscale” games, the ones where you can move around, is two meters by two meters, or 6.5 by 6.5 feet.
I had hoped to perhaps use my driveway as a play space, but the Oculus comes with warnings not to use it outdoors. This is for a few different reasons. First, you are totally blind to your surroundings while you’re immersed in a game, so you may not notice people, cars, squirrels, and so on entering your space. Second, the headset uses little cameras to figure out where it is (and where your hands are), and it can’t work in the dark or in extremely bright light. And thirdly, if sunlight gets on the lenses, you are screwed. Even a few minutes of sunlight—say you take your headset off and leave it screen-side-up on a sunny day—can destroy the device.
So, I set up my Guardian and began exploring the virtual world. When you start up the headset, you’re in a virtual home-like environment with menus appearing as a giant virtual screen in front of you. The border I drew was invisible, but if I ever got too close to it, I saw it appear momentarily, a transparent wall marked with grid lines.
If you walk through the Guardian’s wall, the game world disappears entirely and you see your actual surroundings in that black-and-white view again. I found this handy for placing a water bottle and sweat towel just outside my workout area; I just had to poke my head through the boundary and I could take a drink without having to take my headset off. Another fun feature: you can add your real-world couch to your virtual environment.
What do VR fitness games look like?
The simplest and, I think, best ones throw a stream of objects at you, and your job is to whack them in time with music. Other styles of gameplay include dances where you copy your partner or instructor, and boxing games where you’re immersed in an actual fights. (I found one boxing game so engaging, despite the cheesy graphics, that I walked over to the bench in the in-game locker room expecting to find my water bottle there.)
There are also games that let you play real sports in a virtual world, including simulators for golf and table tennis. Another intriguing format simply creates a continually-moving virtual world around you as you pedal a real-life exercise bike.
Dealing with sweat and practical issues
Active VR games bridge an odd gap between video games (which one plays on a couch while munching Cheetos) and workouts (which one does in sweat-wicking clothing.) The difference takes some getting used to. For example, I had to work out the best way to arrange my hair. Normally I go for a bun or ponytail when I exercise, but the device’s straps get in the way. A low braid was the best option that I found.
Another thing I found, as I browsed virtual-reality forums, is that people who are really into using VR for exercise have tricked out their headsets with aftermarket straps and accessories. One of these I actually bought was a silicone cover for the part of the device that touches your face. (Mine was an off-brand cheap one, but I’m told the VR Cover is the Cadillac of such attachments.) This stops sweat from soaking into the foam, which makes for a much less gross handoff when your son borrows the headset to play Beat Saber and returns it all wet and stinky.
Suitably equipped, I’ve been playing through a bunch of games, and next week I’ll take you on a full tour of my favorites. If you’ve done VR fitness workouts, let us know in the comments how you liked them, and if there are any games I should make sure not to miss.
which made their debut in the midst of crypto and mortgage booms, respectively. Investors had the challenge of trying to chart out a normalized earnings and revenue path. So far, neither of those prior examples have worked out for initial public investors.
Robinhood derives the vast majority of its revenue from trading by its customers, including in cryptocurrencies like Dogecoin. In this topsy-turvy market, it will be quite difficult to forecast what that activity level looks like a year from now. Plus, its primary trading revenue source is payment for order flow, one of the most hotly debated topics in finance and in Washington.
Amid that uncertainty, there is one measure that cuts through a lot of the noise: how much an investor would be paying at the IPO valuation per funded account. That is a way to benchmark Robinhood to established peers in the retail brokerage business.
At the proposed IPO price range set on Monday, a funded Robinhood customer account is worth about $1,500 to $1,600. Contrast that to a long-term average of about $2,000 for E*Trade over the past 15 years, before it was acquired for about $1,800 by Morgan Stanley, according to figures compiled by Christian Bolu of Autonomous Research. Charles Schwab, a much broader wealth- and asset-management business, has traded around $3,600 historically, and is closer to $4,000 today.
Vlad Tenev, co-founder and chief executive officer of Robinhood Markets. It will be Robinhood’s broad appeal that is most vital to justifying the IPO price.
Photo:
Daniel Acker/Bloomberg News
So that multiple isn’t by itself wild and suggests that, even if Robinhood has to alter its revenue model, it could still be a viable business just by virtue of the number of customers it has. But it also is giving Robinhood credit for a lot of growth it has yet to achieve. Consider that Robinhood’s typical funded account had about $4,500 worth of assets in custody at the end of the second quarter. The established retail brokers’ typical accounts are well into the six figures.
Yes, Robinhood’s accounts on average trade more. But overall, Robinhood still generates much less revenue out of its customers, in part because they are smaller. In the first quarter, average revenue per user was $137 at Robinhood. By contrast, TD Ameritrade and E*Trade were generating more than $500 around the time they were acquired, according to Autonomous. Charles Schwab was above $600 in the first quarter.
So the per-account price implies that Robinhood will either far better monetize its customers in the future, grow them at a much faster rate, or some combination thereof. Faster growth is much more likely, based on recent history: Schwab added 1.7 million net new brokerage accounts in the second quarter, while Robinhood added 4.5 million funded accounts on net. “Expanding the universe of investors has been, and we expect will continue to be, a significant driver of our market-leading growth,” Robinhood writes in the IPO prospectus.
Meanwhile, per-user revenue trends are already slowing. Preliminary second-quarter results given by Robinhood imply a drop-off in average revenue per user to under $120, with Robinhood noting that, while cryptocurrency and options trading are growing, equities trading activity in the second quarter was lower than it was a year ago.
The company can build on other revenue streams, which include margin loans to customers and cash management. But low pricing is a vital part of the company’s mission to expand its customer base. The company is still building out its securities lending platform, which could generate incremental revenue. In the face of slowing trading activity, though—and that includes crypto in the third quarter, according to the company—it is hard to bank on significant per-user revenue growth in the near future.
So it will be Robinhood’s broad appeal that is most vital to justifying the price. That makes the IPO itself a pivotal moment. Robinhood will be distributing potentially over 20 million shares to its own customers via its own platform. If the deal doesn’t perform well out of the gate for any reason, that could frustrate some of its most engaged customers.
Investors might have to wait for the dust to settle on this offering before thinking about nabbing any Robinhood stock for themselves.
The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ
NEW DELHI—India is gearing up for tech IPOs, including two worth more than $1 billion, as startups look to tap a stock market that has proved resilient despite Covid-19.
The initial public offerings reflect the maturing of a generation of e-commerce and digital-economy companies, bankers say, many of which have grown rapidly during the pandemic as well-off city-dwellers turn to them when purchasing products from milk to medicines.
On July 16, the operator of the Paytm digital-finance app, One97 Communications Ltd., filed a prospectus for what would be India’s largest IPO in local-currency terms. The group offers services such as a mobile wallet, loans and stock-trading, and is backed by
Jack Ma’s
Chinese financial-technology giant Ant Group Co. One97 aims to issue new and existing shares worth a total of up to 166 billion rupees, the equivalent of $2.23 billion.
Other companies considering IPOs include digital-payments platform One MobiKwik Systems Ltd., which filed its prospectus earlier this month, and logistics and supply-chain-services provider Delhivery Pvt., according to a company spokeswoman. Online cosmetics seller Nykaa E-Retail Pvt., API Holdings Pvt., the parent company of online pharmacy PharmEasy, and PB Fintech Pvt., the parent of insurance aggregator Policybazaar.com, are also considering listings, according to people familiar with their plans.
“This is the first set of these companies coming to the public market” in India, said
Kaustubh Kulkarni,
the head of investment banking for India at the local unit of
Demand for the shares is likely to be strong, given the companies’ brand recognition, said Mr. Kulkarni, who is also the bank’s co-head of investment banking for South and Southeast Asia. “Most of these companies are offering products, services or capabilities which millions, if not hundreds of millions, of customers are utilizing on a day-to-day basis,” he said.
Last week investors placed orders worth 38 times the shares being offered by Zomato Ltd., India’s answer to
The food-delivery group raised around 94 billion rupees, the equivalent of $1.26 billion, and its shares are due to start trading on July 27.
Some market-watchers say Indian tech has plenty of room to grow, as more consumption shifts online. Earlier-stage investors have poured about $16 billion into Indian startups this year, creating 16 new unicorns—young private companies valued at $1 billion or more—according to data firm Venture Intelligence.
India’s unicorn population will rise to 150 by 2025 from 60 now, predicted
’s investment-banking arm. Many will eventually look to float, he said, translating into a big increase in market capitalization.
“India will see $300 billion to $400 billion of market-cap creation in the internet ecosystem in the next five years,” said Mr. Singhal.
The deals already under way show how India’s financial sector has been swept up in an international boom, even as the country records more than 30,000 new Covid-19 cases a day, among the highest daily counts in the world.
The operator of the Paytm digital-finance app filed a prospectus for what would be India’s largest IPO in local-currency terms.
Photo:
Dhiraj Singh/Bloomberg News
India’s 22 IPOs in the first six months of 2021 brought in $3.7 billion, a record half-year haul, according to Prime Database Group, a research firm in New Delhi. Shares in some recently listed companies are trading at twice their IPO price.
At the same time, Indian stock indexes have soared as investors bet on big listed companies. The S&P BSE Sensex has hit a series of record highs, most recently on July 15, and international investors have poured about $7.7 billion into Indian shares this year, official data shows.
Millions of individual Indian investors are trading stocks for the first time, again mirroring trends seen in the U.S. and some other markets.
Harpreet Singh,
a 23-year-old from the northern city of Pathankot, started dabbling in the market last year while waiting for the chance to study abroad.
Relying on advice from videos on YouTube and Telegram, Mr. Singh said, he has lost money at times—but still finds trading stocks more appealing than getting a job in his hometown, where he said private-sector work pays barely 10,000 rupees a month, equivalent to about $134.
“If you have knowledge of stocks,” he said, “then in three to four months you can earn hundreds of thousands of rupees, sitting at home.”
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.
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.”
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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
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.
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
