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“One step forward and two steps back” is seemingly the musical note the stock market is dancing to as it tries to reconcile the correct rhythm between risk and reward. Although regulators and major banks have rushed to support beleaguered regional lenders, investor sentiment has turned negative, fearing a potential repeat of the 2008 financial crisis. But these two situations are vastly different.
Financial regulators and government agencies from both the U.S. and internationally have been proactive in trying to instill confidence in the global financial system. JPMorgan Chase (JPM) and Bank of America (BAC) were two of eleven banks who on Thursday pledged $30 billion in deposits to beleaguered First Republic (FRC). Meanwhile, on the other side of the Atlantic, the European Central Bank on Thursday raised interest rates by 50 basis points.
What’s more, in her post-policy press conference, President Christine Lagarde attempted to raise investor and consumer confidence, affirming that banking sector was currently in a “much, much stronger position” compared to the 2008 financial crisis. “We are monitoring current market tensions closely and stand ready to respond as necessary to preserve price stability and financial stability,” Lagarde said. Although that, and the U.S. efforts, helped lift market sentiment on Thursday, Friday’s saw the markets take two steps back.
The crisis remains the focus. Stocks fell on Friday with the The Dow Jones Industrial Average losing 384.57 points, or 1.19%, to close at 31,861.98, but avoided the session’s low of 31,728.70. Declines in Apple (AAPL), IBM (IBM), Intel (INTC), Salesforce (CRM) and Microsoft (MSFT) pressured the blue chip index. With all eleven S&P 500 index sectors in negative territory, the S&P 500 Index dropped 43.64 points, or 1.10%, to close at 3,916.64, while the tech-heavy Nasdaq Composite gave up 86.76 points, or 0.74%, to end the session at 11,630.51.
Not surprisingly, Financials led by a more than 3% drop in the S&P 500 index. But this week wasn’t all bad news. The recent inflation data showed that the consumer price index (CPI) rose 0.4% in February and 6% from a year ago, but came in line with market expectations. The question is whether data will be enough to keep the Federal Reserve from being too hawkish in its interest rate policy, particularly amid the recent turmoil in the banking industry.
As for this week, the market is betting for the Fed to hike rates by another 25 basis points. The CPI data has put that probability at about a 85% chance, according to the CME Group estimate. It remains to be seen what the reaction will be from the markets. In the meantime, increasing exposure on this recent pullback might be a sound strategy, particularly in areas like technology and consumer discretionary.
While there are far fewer earnings on a weekly basis, there are still a few key ones to watch. Here are the two I’ll be paying close attention to.
GameStop (GME) – Reports after the close, Tuesday, Mar. 21
Wall Street expects GameStop to post a per-share loss of 13 cents on revenue of $2.18 billion. This compares to the year-ago quarter when the loss was 46 cents per share on revenue of $2.25 billion.
What to watch: Meme stock mania hasn’t taken off as it did a year ago, but GameStop remains one of the most widely-followed stocks on the market, thanks in part to its strong momentum and also the fact that it is owned by some prominent retail investors. Outside of that, the video game retailer has shown some solid fundamentals, demonstrating positive cash flow and an overall strong financial standing. Despite all of this, the stock has fallen some 45% in six months, compared to a 2% rise in the S&P 500 index. The shares are down 12% year to date, while the S&P 500 has risen 2%.
Currently trading at around $16 per share, the stock is off near 70% from its 52-week high of around $50. The company has felt the after-effects of its ill-timed partnership with the now-defunct FTX which, at the time of the partnership, aimed to introduce its customer base to the digital asset ecosystem. Now the question is, what does the brick-and-mortar video game retailer want to be? In the most recent quarter, revenue was down 8.5% year over year, thanks to a more-than 6% decline in hardware and accessories category. Aside from supply chain constraints for new generation hardware, GameStop also suffered from slowing demand on certain previous generation hardware. However, the collectibles category was a bright spot with revenue rising 8% year over year. Operating cash flow was also strong, rising to $177.3 million. On Tuesday GameStop will need to build on its Q3 success and show it is playing for keeps.
Nike (NKE) – Reports after the close, Tuesday, Mar. 21
Wall Street expects Nike to earn 54 cents per share on revenue of $11.44 billion. This compares to the year-ago quarter when earnings came to 87 cents per share on revenue of $10.87 billion.
What to watch: Despite rising 16% over the past six months, besting the 2% rise in the S&P 500 index, shares of Nike still looks relatively cheap, when compared to the company’s long-term potential, particularly with its Direct-to-Consumer (DTC) business. That segment is not only a more profitable business than the wholesale segment, DTC also gives Nike more pricing power while allowing the company to affect the consumer buying experience. As it stands, DTC now accounts for 43% of the company’s total revenue, compared to just a little over 27% six years ago. In addition to the DTC business, Nike’s online distribution and its online channels has been an area where the company has invested heavily. There is an estimated 160 million active members in the company’s online membership and loyalty programs. These collective initiatives has helped Nike stay well ahead of the competition in areas such as running, basketball, and the general footwear brand. The company also stands to benefit from the re-opening in China which has relaxed some of its Covid restrictions to spur economic growth. As such, Nike’s brand and global presence in the athletic footwear market makes it a strong stock to hold for the long term of 12 to 18 months. On Tuesday the shares will react positively if the company can delivery a top and bottom line beat along with positive guidance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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