4 min read

Travel is Back, Marijuana's Moment, and the Rout in Semis - the Week in Themes

Travel is Back, Marijuana's Moment, and the Rout in Semis - the Week in Themes

What happened?

In the decade-plus that followed the 2007-08 Financial Crisis, the Federal Reserve showed extreme caution in nurturing a fragile U.S. economy and stock market back to health. The labor market, one of two core inputs that dictate Fed policy, showed impressive resilience, with the unemployment rate gradually falling from an ‘09 high of 10% to a pre-pandemic low of 3.5% in Feb ‘20.

The pandemic induced lockdown sent the unemployment rate soaring to 14.7% in April ‘20, but stimulus, vaccines, and the economy’s gradual reopening have brought a swift bounce for the labor market, with the jobless rate falling to 4% last month.

But for years it was stubbornly low inflation, not the strength of the labor market, that prevented the Federal Reserve from normalizing interest rates.

Price growth hovered around 2% for much of the 2010s, and then threatened to turn negative during the early days of Covid-19 as U.S. GDP contracted at a 31% annualized rate in Q2 2020.

All of that feels like a distant memory by now. Last Thursday’s reading of the Consumer Price Index showed inflation rose 7.5% in the twelve months ending in January, surpassing estimates of 7.3%.

The headline number is staggering – representing the fastest year-over-year inflation growth since 1982.

Used cars (+40.5% YoY), gasoline (+40%), food at home (+7%), and piped gas service (+23.9%) were standout culprits. Couple the CPI reading with a housing market that saw home prices up nearly 20% in 2021, and the stage was set for further calls to action to quell the rise in inflation. Fed futures expectations surged following the reading, with the market now pricing a greater than fifty percent chance the Fed will hike 50bps at its mid-March meeting.

The market didn’t digest the news well as the S&P 500 traded sharply lower, with the selloff accelerating into the close Friday on new warnings from the White House that Americans should leave Ukraine immediately. On the week, the S&P finished off 1.8% with the tech-heavy Nasdaq shedding nearly 3%.

As Jack Hough at Barron’s highlights, with investor appetite for beta and high growth nonexistent, value continues to outperform. The Russell 1000 Growth index has been bludgeoned in 2022, off 9% for the year, while the Russell 1000 Value index is down a mere 1%.

It’s times like these that we like to remember: thematic baskets don’t have to imply high multiple stocks. Or high volatility.

Themes can be built around value, defensive, and inflation-protected strategies as well.

Themes in focus:

What worked?

Travel and leisure – travel is back! That was the resounding message from Expedia (EXPE, +2.9% last week) and Disney (DIS, +4.2%). Expedia saw a surge in booking-related activity and Disney was powered by strength in its theme parks business with analyst Michael Nathanson projecting a ‘massive recovery’ that’s still in its early innings. Airlines were boosted by M&A as two discount carriers agreed to merge to start the week when Frontier announced it will buy Spirit Airlines for $6.6B.

Meanwhile, Chipotle reported blowout earnings that lifted the stock 5.1% last week, with CEO Brian Niccol expressing gratitude that the burrito-maker has the ability to pass along higher costs to its customers. Dining strength paired with strong performance for travel stocks to power the Travel and Leisure ETF (AWAY) to a 4% gain on the week.

Marijuana – one of the worst performers amidst the growth meltdown, marijuana stocks may have finally found a bottom. Sentiment has improved following the passing of the Secure and Fair Enforcement Banking Act which allows banks to work with state-licensed cannabis businesses.

This is a sector that many institutional asset managers can’t touch before some of these regulatory hurdles are cleared – so passage of further legislation could open the doors for further inflows. The AdvisorShares Pure U.S. Cannabis ETF (MSOS) closed up 9% last week.

Metals and Mining – the XME Metals and Mining ETF was up 8.8% on the week – driven by strength in gold (GDX, +5.7%) and copper mining (COPX, +6.2%). Freeport McMoran was the darling of the group (FCX, +11.1%) driven by lofty copper prices and investor search for dividends and inflation-protected themes.

China is by far the world’s largest copper consumer and this group hinges on the country’s growth and appetite for infrastructure development.

Oil and gas – one of the brightest pockets of the market in 2022, a confluence of factors continue to push this group higher:

  • Russia-Ukraine tensions that would see the suspension of the Nord 2 natural gas pipeline in the event of invasion
  • Major supply-demand imbalance due to a cold winter and lack of OPEC production response
  • Reopening and expectations for a huge travel season
  • Under-invested and represented group in most institutional portfolios forcing PMs to choose between returns and ESG backlash

The XOP Oil and Gas ETF was up 2.6% on the week, inline with the First Trust Nat Gas ETF (+2.5%). U.S. producers Diamondback Energy (+21.2% YTD) and Pioneer Natural Resources (+23.5%) have been monsters this year.

What struggled?

Semis – price pressures, an ongoing chip shortage, and investor aversion to high multiples continues to weigh on semis. Nvidia (NVDA, -7.3%) and Advanced Micro Devices (AMD, -10%) were both hammered on Friday, driving weakness in the VanEck Semiconductor ETF (SMH) which finished off 3.1% for the week.

Large-cap tech – the broader market was unfazed during much of the November-January rout of high growth stocks as money rotated into mega-cap tech names and higher rate beneficiaries like energy and banks. Apple, Microsoft, Amazon, and Alphabet make up just ~21% of the S&P 500, leading to the oft-used refrain that the market will hold up so long as this group does.

That narrative proved true this week, as the teflon strength in the mega-caps showed some vulnerability. Tech is the largest weighting in the S&P 500, and as such, much of the market’s weakness can be attributed to a 3.1% pullback in the XLK Technology SPDR ETF this week.

The week ahead

With roughly 80% of companies having reported Q4 earnings, company-specific news will pale relative to Fed hysteria and geopolitical updates.

Earnings releases of note include Airbnb (Tuesday), Nvidia and Shopify (Wednesday), and Walmart (Thursday).

The Super Bowl tonight will be headlined by two likable quarterbacks with an age gap, and riddled throughout with ads for Bud Lights, Doritos, and a much hyped crypto giveaway by FTX.

Disclaimer: all opinions expressed are the author’s own and nothing contained in this column is intended as financial advice