Family Dollar voluntarily recalled dozens of over-the-counter drugs, products and medical devices sold at its stores because they had been stored at improper temperatures, according to the Food and Drug Administration late Tuesday.
On the FDA’s website, the regulator said products affected by the recall were stored “outside of labeled temperature requirements by Family Dollar and inadvertently shipped to certain stores on or around June 1, 2023 through September 21, 2023.”
The items were sold at stores in Alabama, Arkansas, Arizona, California, Colorado, Florida, Georgia, Idaho, Kansas, Louisiana, Mississippi, Montana, North Dakota, Nebraska, New Mexico, Nevada, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington and Wyoming, between June 1 and Oct. 4, the FDA said.
The thing that will make companies lower prices is if consumers stop complaining about paying more for the things they need and want, and actually start refusing to buy them.
As the U.S. corporate earnings-reporting season progresses, with earnings from major retailers Walmart Inc. WMT, +0.59%,
Target Corp. TGT, +0.10%
and Home Depot Inc. HD, +0.52%
on tap next week, investors can get a ground-floor view of how consumer demand may have been hurt, or not, by higher prices, and what the companies plan to do, or not do, about it.
This dynamic of how consumers adjust their spending habits when prices change is referred to by economists as the price elasticity of demand.
“ For companies to cut prices, ‘you have to have the consumer go on strike, and they’re not there yet.’”
— Jamie Cox, Harris Financial Group
Those who trust companies will choose to ratchet down prices on their own, or at least not raise them because the rise in input costs has been slowing, haven’t been listening to what the many companies have told analysts on their post-earnings-report conference calls.
Kraft Heinz Co. KHC, +0.47%
acknowledged after its second-quarter report that its relatively higher prices have hurt demand, but not by enough for the food and condiments company to consider cutting prices.
Colgate-Palmolive Co. CL, +0.81%
said it will continue to raise prices, even as inflation slows and selling volume declines, as the consumer-products company continues to be laser focused on boosting margins and profits.
And while PepsiCo Inc. PEP, +0.16%
was worried that elasticities would increase, given how its lower-income customers were being particularly pressured by inflation, the beverage and snack giant reported strong results as it witnessed “better elasticities” in most of the markets in which it operated.
“Obviously, there is still carryover pricing, and I don’t think we’ll do anything different than our normal cycles on pricing in the balance of the year,” PepsiCo Chief Financial Officer Hugh Johnston told analysts, according to an AlphaSense transcript.
Basically, as MarketWatch has reported, so-called greedflation is alive and well.
Jamie Cox, managing partner for Harris Financial Group, said as long as the job market stays strong, as it is now, corporate greed will continue to pay off.
“If something is more expensive, and you have a job, you’ll complain about it, but you won’t substitute it for something cheaper,” Cox said. For companies to cut prices, “you have to have the consumer go on strike, and they’re not there yet,” Cox added.
“ ‘At some point, people are going to say, “All right — enough.” ’ ”
— Paul Nolte, Murphy & Sylvest Wealth Management
The reason elasticity is so important in the current environment is that, as long as consumers continue to pay the higher prices companies are charging, inflation will remain stubbornly high, making it, in turn, more likely that the Federal Reserve will continue to raise interest rates or, at the very least, not lower them.
But the longer interest rates stay high enough to crimp economic growth, the more likely the stock market will reverse lower as recession fears rise.
“At some point, people are going to say, ‘All right — enough,’ ” said Paul Nolte, senior wealth manager and market strategist at Murphy & Sylvest Wealth Management. “But we just haven’t seen that yet.”
What is elasticity?
Economists use the term “price elasticity of demand” to refer to the way in which consumers adjust their spending habits when prices change.
“Elasticity tries to measure how much more producers will want to produce if prices rise, and how much more consumers will want to buy if prices fall,” explained Bill Adams, chief economist at Comerica.
Elasticity often depends on the type of product a company sells.
For example, consumer-discretionary-goods companies that sell products and services that people want will often experience greater price elasticity than consumer-staples companies that sell things that people need, such as groceries and prescription drugs.
But even for needs, consumers often still have a choice, as less expensive generic, or private-label, alternatives may be available.
Andre Schulten, chief financial officer of consumer-staples maker Procter & Gamble Co. PG, +0.58%,
which recently beat earnings expectations as it continued to raise prices, telling analysts that, while there was “some trading into private label,” the overall market share of private-label products was unchanged for the year.
As Harris Financial’s Cox said, consumers may be complaining about higher prices, but they aren’t yet desperate enough to stop buying.
The Federal Reserve’s latest Beige Book economic survey stated that business contacts in some districts had observed a “reluctance” to raise prices as consumers appeared to have grown more sensitive to prices, but other districts reported “solid demand” allowed companies to maintain prices and profitability.
That’s likely why companies and analysts have become less concerned about price elasticity. Based on a FactSet analysis, mentions of the word “elasticity” in press releases and conference calls of S&P 500 companies SPX
increased as inflation and interest rates started surging in early 2022 through the end of the year.
Mentions of the word elasticity in earnings press releases and conference-call transcripts of S&P 500 companies.
FactSet
As the chart shows, “elasticity” popped up in more than 55% of earnings releases and conference calls in mid-2022, but with the second-quarter 2023 earnings-reporting season more than half over, mentions had dropped to about 20%.
Perhaps that will pick up, as retailers, especially those catering to lower-income customers — recall the PepsiCo comment — assess the demand impact of continued price increases.
Meanwhile, the branded-foods company Conagra Brands Inc. CAG, +0.71%,
whose wide-ranging food brands including Birds Eye, Duncan Hines, Hunt’s, Orville Redenbacher’s and Slim Jim, were starting to see the emergence of a different dynamic.
Chief Executive Sean Connolly said consumers were shifting behavior in some categories as prices remained high. Rather than trade down to lower-priced alternatives, he noticed some consumers buying fewer items overall, “more of a hunkering down than a trading down.”
That’s exactly the kind of consumer behavior that is needed, if companies are to stop feeding into the greedflation phenomenon and to start pulling back on prices.
It may not have been a surprise to see the consumer discretionary sector of the S&P 500 get hammered last year amid talk of a looming recession while the Federal Reserve jacked up interest rates to push back against inflation.
But the stock market always looks ahead. Following a decline of 19.4% for the S&P 500 SPX, +0.42%
in 2022 and a 37.6% drop for the benchmark index’s consumer discretionary sector, this may be the time to begin looking for bargains.
And now, analysts at Jefferies have lifted the sector to a “bullish” rating.
In a note to clients on Jan. 10, Jefferies’ global equity strategist, Sean Darby, wrote: “A Goldilocks scenario might be unfolding for the U.S. consumer — falling inflation but steady employment conditions.”
He sees consumer confidence improving, in part because “households are still sitting on [about] $1.4 trillion of Covid savings.”
Darby pointed to a list of 18 consumer discretionary stocks favored by Jefferies analysts that was published on Jan. 6. Those are listed below, along with three stocks in the sector the analysts rate “underperform.”
The ratings of the Jefferies analysts for individual stocks is based on their 12-month outlooks for the companies, in keeping with Wall Street tradition.
So we have added another list further down, showing which companies in the S&P 500 consumer discretionary sector are expected by analysts polled by FactSet to increase sales the most through 2024.
The Jefferies 18
Here are the 18 consumer discretionary stocks recommended by Jefferies analysts with “buy” ratings on Jan. 6, sorted by how much upside the firm sees for the shares from closing prices on Jan. 9:
Click on the tickers for more information about the companies.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The two right-most columns on the table show estimated compound annual growth rates (CAGR) for the companies over the past three calendar years and expected sales CAGR for two years through calendar 2024, based on the companies’ financial reports and consensus estimates among analysts polled by FactSet.
(We used calendar-year numbers, some of which are estimated by FactSet for prior years, because some companies have fiscal years or even months that don’t match the calendar.)
The stock pick with the highest 12-month upside potential, based on Jefferies’ price target, is Topgolf Callaway Brands Corp. MODG, -0.22%.
This company has the highest estimated three-year sales CAGR on the list, and has the third-highest projected sales CAGR through 2024, after Planet Fitness Inc. PLNT, +0.69%
and Chewy Inc. CHWY, +1.63%.
On Jan. 6, the Jefferies analysts also listed three stocks in the sector they rated “underperform.” Here they are, sorted by how much the analysts expect the stocks to decline over the next 12 months:
A look head at which companies are expected to increase sales the most over the next two years might serve as a good starting point for your own research.
Bear in mind that some of the companies in travel-related industries suffered declining sales for three years through 2022 because of the coronavirus pandemic. Some of those are on this new list of 20 stocks in the S&P 500 consumer discretionary sector expected to show the highest two-year sales CAGR through calendar 2024:
Among the companies on this list that didn’t suffer sales declines from 2019 levels, Tesla Inc. TSLA, -1.83%
is expected to achieve the highest two-year sales CAGR through 2022.
Dollar General Corp. DG, -0.26%
is the only company to appear on this list based on consensus sales growth estimates and the Jefferies recommended list.
The Dow Jones Industrial Average rose nearly 600 points on Friday to its highest level in two months as the blue-chip gauge remained on track for a sixth straight session in the green in what would be its longest winning streak since May 27, according to Dow Jones Market Data.
All three major indexes were trading higher as expectations that the Federal Reserve will shift toward smaller interest-rate hikes after its November meeting have offset weak earnings this week from some of the market’s biggest megacap technology names.
How are stocks trading?
The S&P 500 SPX, +1.67%
gained 59 points, or 1.6%, to 3,866.
The Dow Jones Industrial Average DJIA, +1.98%
rose 589 points, or 1.8%, to 32,623.
The Nasdaq Composite COMP, +1.80%
advanced 181 points, or 1.7%, to 10,974.
Both the S&P 500 and Nasdaq were on track to cement their second weekly gain in a row on Friday, although the tech-heavy Nasdaq has substantially lagged after Thursday’s performance, where it was the only one of the major indexes to finish in the red following abysmal earnings from Meta Platforms Inc.
Barring an intraday turnaround, the Dow is on track to log its fourth straight weekly advance. It remains down just 10.2% so far this year.
The blue-chip gauge has risen 5% so far this week, while the S&P 500 is up 3.1% and the Nasdaq has risen 1.1%.
What’s driving markets?
All eyes were on the Dow Friday as the blue-chip gauge was the only major index to reach new notable highs late this week as its advance during the month of October has somewhat ameliorated its losses for the year so far.
The Dow has risen 13.5% since the start of the month, leaving it on track for its best October performance since it was created in the late 19th century.
Perhaps the biggest reason for the Dow’s rise this month is tied to its composition. The average is generally light on technology stocks, while including more of the energy and industrial stocks that have outperformed this year.
“The Dow just has more of the winners embedded in it and that has been the secret to its success,” said Art Hogan, chief market strategist at B.Reily Wealth.
Despite some volatility in the premarket session, all three major indexes turned higher after the open as investors remained fixated on expectations for the Fed to down shift to smaller interest rate hikes after next week’s policy meeting — an expectation that endured after the latest reports on inflation and wage growth released Friday.
Brad Conger, deputy chief investment officer at Hirtle, Callaghan & Co., said Friday’s data didn’t interfere with mounting expectations that the Fed might soon pause its campaign of aggressive rate hikes.
“Basically, the market is starting to price in a pause, not a pivot, but maybe a pause. The end is in sight,” Conger said.
The September core personal consumption expenditures price index — the Fed’s preferred gauge of inflation pressures — came in roughly in line with economists expectations, while a more modest 1.2% gain in private wages and salaries in the third quarter was interpreted as a sign that wage growth may have finally peaked, according to Andrew Hunter, senior U.S. economist at Capital Economics.
“The Federal Reserve has not yet broken the persistent trend in core inflation and so will likely stay aggressive at next week’s meeting. However, some areas of the economy show significant weakness and could build the case that the Fed downshifts to smaller rate hikes in 2023,” Jeffrey Roach, Chief Economist for LPL Financial in Charlotte, NC, said.
Since the start of the week, investors have digested a batch of disappointing numbers from some of America’s largest tech companies, which helped to sully the overall quality of S&P 500 earnings this quarter.
On Thursday night, Amazon.com AMZN, -9.29%
joined Microsoft Corp. MSFT, +2.75%,
Alphabet Inc. GOOGL, +2.76%
and Meta META, +0.34%
by publishing disappointing earnings for the quarter that ended Sept. 30.
But despite the disappointing results reported this week, in aggregate, S&P 500 firms are beating earnings expectations by 3.8%, according to Refinitiv data. That’s compared to a long-term average of 4.1% since 1994. However, if energy firms are excluded, the picture darkens substantially.
Shares of Amazon were off 10% after the e-commerce giant, which dominates the consumer-discretionary sector, predicted slower holiday sales and profit while also reporting slower-than-expected growth in its key cloud-computing business.
Peter Garnry, head of equity strategy at Saxo Bank, said investors were unnerved by Amazon’s guidance cut.
“The outlook for Q4 was what terrified investors with the retailer guidance operating income in the range $0-4 billion vs est. $4.7 billion and revenue of $140-148 billion vs est. $155.5 billion,” he said in a note.
One notable exception to the downbeat earnings news this week was Apple Inc. AAPL, +7.21%,
which proved a bright spot after the iPhone maker’s revenue and earnings topped forecasts, helped by record back-to-school sales of Macs. Shares were up nearly 0.9% in premarket trading.
Companies in focus
Oil giants Chevron Corp.CVX and Exxon Mobil Corp. XOM were climbing on Friday after reporting strong results. Chevron is a Dow component.
Intel Corp.INTC shares advanced more than 8% after reporting an earnings beat. The chip maker said it would cut costs by $3 billion next year, and lay off employees, as it trimmed its outlook again.
