⚔️ War and Stocks

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The Street Says: In one year from now, do you think Ukraine will be an independent nation or do you think it will be under Russian control? Click here to vote.

REVIEW

US stocks fell Friday as concern over the escalating armed conflict in Ukraine weighed on investor sentiment. The blue-chip Dow Jones Industrial Average posted its fourth-straight losing week as stocks broadly sold off across various sectors. It all followed reports of smoke rising from a nuclear power plant in Ukraine that had reportedly been attacked by Russian forces. The plant is Europe’s largest nuclear facility and energy prices moved higher in response to the attack, including West Texas Intermediate crude and global benchmark Brent crude. Generally speaking, investors appear to be risk-averse at the moment, with 10-year Treasury yields plunging as traders pivoted into bonds and other fixed-income assets. The downturn overshadowed a better-than-expected jobs report that showed the economy added 678,000 jobs last month — easily eclipsing the 440,000 that had been predicted. Meanwhile, the unemployment rate fell to 3.9% in February, from 4.0% in January. It marked the final jobs report prior to the Federal Reserve’s next meeting, at which the central bank is expected to enact the first of several rate hikes. Earlier last week, Fed Chair Jerome Powell indicated he’s likely to support a 25-basis-point increase to the Fed’s target rate. Analysts note the Federal Reserve is always looking to strike a balance with its monetary policy in consideration of both inflation and the labor market. In company-specific news, Tesla CEO Elon Musk made headlines at the close of the week when he challenged the United Auto Workers to try to organize employees at his company’s assembly plant in Fremont, California. Retailer Costco posted earnings that beat analyst expectations for profit, revenue, and same-store sales growth. Still, sales grew at a slower pace over the last quarter when compared to the previous three-month period. Hellman & Friedman has purchased a 7.5% stake in software company Splunk, making the private equity firm Splunk’s largest shareholder. On the downside, companies associated with travel moved lower, including American Airlines, United, and Delta. For the week as a whole, the Dow Jones Industrial Average lost 1.3%. The S&P 500 also fell 1.3%, and the Nasdaq Composite shed 2.8%.

PREVIEW

On Monday, the Federal Reserve reports on consumer credit for January. This includes things like credit cards and personal loans used to purchase goods and services. Consumer credit grew overall in December, but at a slower rate than what was observed during the previous month. Personal debt grew by 5.4% in December, but the number came in at 10.7% for November.

Tomorrow, the National Federation of Independent Business releases its small-business index for February. This is a general snapshot of how things are going within the small-business sector, which accounts for around 50% of all private jobs in the US. The NFIB small business index looks at 10 seasonally adjusted factors. It decreased slightly in January by 1.8 points to 97.1, with many small businesses continuing to face struggles dealing with inflation. January’s foreign trade deficit and the revised number for January’s wholesale inventories will also be published.

Job openings for January are due on Wednesday. The US Labor Department issues this Job Openings and Labor Turnover Survey (JOLTS) every month and economists consider it an indication of labor demand. Job openings increased in December to 10.9 million, nearly matching last July’s all-time high of 11.098 million. Meanwhile, job resignations fell by 161,000 to 4.3 million, which is still considered high amid what some have called “The Great Resignation.”

Thursday, the market will be paying close attention to the latest inflation data. The consumer price index and core consumer price index are due for February. The core CPI strips out energy and food when surveying prices, while the CPI is known as the “all items” index. In January, the CPI rose 7.5% for the preceding 12 months — the fastest rate of price increase since February 1982. Core CPI rose 6% year-over-year, the largest such change since August 1982. More job market data is also set for release, as new and pre-existing unemployment claims will be published. It’s a busy day for economic data as the seasonally adjusted real domestic nonfinancial debt for the fourth quarter, seasonally adjusted real household wealth for the fourth quarter, and the Federal budget deficit for February are all set for release as well.

Friday, the University of Michigan will report March’s preliminary consumer sentiment index, as well as preliminary five-year inflation expectations for March.

Here’s what’s on deck for this week’s earnings calls:

Tomorrow, Canadian oil and natural gas company Vermilion Energy (VET) will share its latest earnings report. This comes as global energy prices are rising in response to Russia’s invasion of Ukraine, and the possibility of Russian oil and gas deliveries being disrupted grows. On Tuesday, Dick’s Sporting Goods (DKS) will post its most recent quarterly results. The retailer’s previous four earnings reports have beat analyst estimates on the top and bottom lines. Wednesday, Campbell Soup Company (CPB) reports earnings. The food company is among several in the industry that saw profit margins slide last year amid supply-chain constraints. Thursday, software company Oracle (ORCL) hands in its most recent report card. Oracle just announced last week it has suspended all operations in the Russian Federation as a result of the invasion of Ukraine. Friday, WeWork (WE) shares quarterly results. Its most recent earnings report marked the company’s first since going public in October 2021.

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Iced Coffee Season is Here!

It’s that time of a year, as the temperature starts to tick up and iced coffee becomes the beverage of choice. Avoid that trip to the cafe (and save a few bucks) by making your iced coffee at home.

The Goodful cold brew coffee maker is the perfect addition to any coffee-lover’s arsenal. The pitcher is incredibly easy to use, just add your coffee grounds to the filter, pour over cold water, and let it sit in the fridge until you’re ready to serve! Cleaning is also a breeze since it’s dishwasher safe! 

Featuring a durably-made 2.25 quart pitcher, the coffee brewer has a leak-proof lid so everything stays inside until you’re ready to drink. It’s also stain and odor resistant, so you won’t have to worry about lingering aftertastes from the last batch. 

Not big on coffee? No worries. The pitcher can also be used to make teas and other infused beverages. Endless cold beverages recipes will be at your fingertips, so grab your Goodful coffee maker today!

War's Impact on Stocks

If History Is Correct, Stay the Course

The world is watching in horror as Russia invades Ukraine. As we mentioned last week, it’s nearly impossible to decipher what is going on over there. Remember those 13 Ukrainians who said “F-You” to the Russians on Snake Island and then were killed? It turns out they’re alive. How about the “Ghost of Kyiv,” the pilot who single-handedly shot down several Russian fighter jets? Apparently, this guy might be a myth as well.

This is why as investors, it’s never been more important to try to “see the signal through the noise,” as we keep saying. With that in mind, today we want to analyze the question: just how bad is war for the stock market? If history is any guide, companies and the broader economy may be able to weather the storm, presenting a buying opportunity for investors.

That's the perspective of some Wall Street bulls, which have called any Russia/Ukraine stock sell-off a reason to go bargain hunting. They point out previous geopolitical conflicts have not impacted the US economy or stock market over the long haul. As a result, they urge investors to stay the course even as the world teeters through turbulent times.

Watch Out for the “War Puzzle”

As many of you may have heard before, “past performance is not indicative of future results.” However, it’s always fun to take a quick look back at history. From the beginning of World War II in 1939 to 1945, when the war ended, the Dow climbed 50% — growing 7% per year. That was during arguably the most widespread and destructive conflict the world has ever seen outside of the First World War.

Let's take a look at other conflicts using large-cap stocks as our performance proxy. During the Korean War, they rose 18.7%. During the Vietnam War, they rose 6.4%. During the Gulf War, they returned 11.7%. Zooming out, from 1926 to 2013, large-cap stocks returned 10%.

Now, this doesn’t mean stocks only go up. There are multitudes of unknown variables when it comes to war that will have an impact on intermittent share price performance.

Seven years ago, researchers at the Swiss Finance Institute looked at US military conflicts after World War II. They found that stocks tend to fall in pre-war phases when there is a build-up to an invasion. However, get this. Stocks actually rise after the ultimate outbreak. There's no transparent explanation for why stocks jump once wars break out. This is what's known as the "War Puzzle."

Oil Prices Are the Big Question Mark

Russia’s position in the oil markets is significant. The conflict with Ukraine is already causing oil prices to surge over concerns of supply disruptions. Russia is a big crude oil and natural gas producer, serving large parts of Europe with energy resources. If that’s cut off it could send energy prices even higher overseas and in the US. In turn, this could further speed up inflation, at which point the Fed might have to get more aggressive with its rate hike schedule. As we’ve seen already, a hawkish Federal reserve tends to put downward pressure on growth and technology stocks. Since tech stocks make up such a massive portion (market-cap-wise) of major averages, any weakness in this sector will probably have ripple effects elsewhere. All of these hypotheticals make our heads hurt.

Time will tell if history repeats itself regarding wartime trends and the overall economic impact. Judging from how the markets have held up relatively well in the early days of the conflict, investors may be better off staying the course, even if it's a rocky ride ahead.

Stocks to Watch During War

US-Centric Companies in Vogue

War is scary, creating uncertainty and volatility. We completely understand there’s a humanitarian crisis unfolding overseas right now and it breaks our hearts. That’s the most important thing to keep in mind, and it’s a reminder to give the ones you love a hug. If you are a financial decision-maker in your household, however, it also means you have to be aware of what’s going on and position yourself and your family accordingly. Hiding out in cash or staying on the sidelines might not be the best option.

Rather than selling off stocks, rotating into new names that can perform well in the current environment may prove to be a better choice. That means finding companies that have strong profits, a good management team, and healthy cash flow. These companies should also have strong balance sheets, a majority of their business in the US, and less exposure to Europe. That will protect your investments if the conflict is long and drawn out.

So which companies fit that bill? According to Wall Street watchers Deere (DE), CarMax (KMX), Evoqua Water Technologies (AQUA), and Constellation Brands (STZ) all do. Here’s why.

Deere, CarMax Should Weather the Conflict Relatively Unscathed

Farm equipment maker Deere is a good place to start. The stock has been under pressure in recent days because about 6% of its sales come from Russia. While that’s worrisome, it's worth noting roughly 70% of Deere’s sales are in North and South America. If commodity prices rise because of the war, US farmers will make more money, some of which they will likely use to purchase farm equipment. Even if Russian sales take a hit, higher commodity prices coupled with the desire to replace aging equipment with more precise farm tech should boost Deere in the current environment.

CarMax is another company that could thrive despite the Russia/Ukraine conflict. The biggest used car dealer in the US is attractive because it can grow regardless of what’s happening overseas. CarMax is targeting the sale of two million cars per year over the course of the next half-decade, which is up from 1.2 million cars sold last year. It doesn’t hurt that about 75% of its fixed costs are offset by parts and service revenue.

Everyone Needs Water, Wine

Evoqua Water Technologies, the water and wastewater treatment company, is another way to get US exposure during the armed conflict. Roughly 80% of its sales come from the US. It serves residential, commercial, and industrial customers, so it isn’t too reliant on capital spending to grow. The investment thesis here isn’t too complicated: everyone needs water.

Wine and beer may not be a necessity, but they tend to be in demand during both good and bad times. Prior to the pandemic, Constellation Brands was on a tear, and now with COVID-19 cases subsiding, growth in volume in the US is picking up again. Constellation Brands is pouring money into US brands including Corona, which should result in better profit margins. The stock is down around 15% since the start of this year, presenting an opportunity for bargain hunters.

Despite the fog of war, there are ways for investors to remain defensive. Finding US-centric companies that can grow in the current environment should go a long way toward protecting your investment portfolio.

POWERED BY GOODFUL

Iced Coffee Season is Here!

It’s that time of a year, as the temperature starts to tick up and iced coffee becomes the beverage of choice. Avoid that trip to the cafe (and save a few bucks) by making your iced coffee at home.

The Goodful cold brew coffee maker is the perfect addition to any coffee-lover’s arsenal. The pitcher is incredibly easy to use, just add your coffee grounds to the filter, pour over cold water, and let it sit in the fridge until you’re ready to serve! Cleaning is also a breeze since it’s dishwasher safe! 

Featuring a durably-made 2.25 quart pitcher, the coffee brewer has a leak-proof lid so everything stays inside until you’re ready to drink. It’s also stain and odor resistant, so you won’t have to worry about lingering aftertastes from the last batch. 

Not big on coffee? No worries. The pitcher can also be used to make teas and other infused beverages. Endless cold beverages recipes will be at your fingertips, so grab your Goodful coffee maker today!

Goodyear Tire Provides EV Exposure

Merger and EVs May Lift Goodyear’s Fortunes

Goodyear (GT) may not be the first company that comes to mind when looking for electric-vehicle-adjacent investments, but opportunities abound for this beleaguered tire maker.

Goodyear’s stock has been under pressure since mid-February when it warned “cost pressures” will continue for several quarters. The tire maker doesn’t expect to have any free cash flow in 2022 and isn’t sure if it can offset input costs, which have soared.

Still, contrarians see an opportunity in Goodyear. They point to potential positives in its recent multibillion-dollar merger with Cooper Tire & Rubber and the shift to electric vehicles, which require higher-end tires.

Cooper Tire Gives it More Exposure

In 2021 Goodyear merged with Cooper Tire & Rubber. Striking a deal with its smaller rival allowed Goodyear to expand its footprint in the North American tire replacement market, which is large and lucrative. Goodyear is going after the high-end buyer, while Cooper Tire & Rubber caters to customers on a budget. Goodyear wants to expand its roughly 20% market share in North America and is eyeing China as another area of growth.

With COVID-19 cases easing and people hitting the road for more trips, Goodyear is expected to benefit from pent-up demand. The company could also see a lift as chip shortages improve and the auto industry resumes normal production.

EV Tires Cost More

Meanwhile the EV market continues to take off, forcing traditional vehicle makers to respond. Electric vehicles require tires that are more durable and provide a smooth ride. The tires have to handle heavier vehicles with quicker acceleration, all while ensuring the best battery life. That necessitates more precision and tends to call for tires that are costlier than those found with internal-combustion engine vehicles.

In December, Goodyear launched its first replacement tire for the EV market. The company said the tire can improve margins by 30% when compared to tires for non-EV vehicles. Growing that business does come at a price. All of its cash this year is going to rebuild inventories and to invest in tires for EVs. Investors don’t appear overly impressed at the moment, but sentiments could change when costs come down and production picks back up.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security.  Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.