what happened
Shares of consumer spending-related stocks are moving higher on Tuesday after some positive economic news from the US and China. But the market’s optimism quickly faded as investors realized that good economic data likely meant we’d see a hike in short-term interest rates from the Federal Reserve tomorrow.
Shares of Carnival Corporation (CCL -0.11%) rose as much as 4.9% in morning trading. MGM Resorts (MGM 1.04%) increased by 3% and Peloton Interactive (PTON 6.43%) jumped by 7.4%. Shares were up 1.8%, 1.8% and 7%, respectively, at 2:20 pm EDT.
And what
The purchasing managers’ manufacturing index, or PMI, was 50.4 for October, which was above the 49.9 estimate by analysts. A reading below 50 for the index indicates that production is slowing, while above 50 indicates growth. The increase in this index was small, but even a small increase is seen as a positive sign in this market.
In China, stocks were jumping on speculation that a zero-COVID policy could end soon. I dug into this in an article here, but the bottom line is that the government has not confirmed any committee to study ending zero-COVID. However, the likelihood of an end to the policy has increased now that the Party Congress has ended and China’s economy is struggling.
Add these two factors together and the Federal Reserve meeting today and tomorrow is expected to lead to a 75 basis point increase in short-term interest rates. Rising rates cause investors to place less value on long-term cash flows, which is why growth stocks have struggled all year.
Now what
Should consumer stocks really react to economic news with this kind of move higher? I don’t think the short-term picture has changed much. Companies like Peloton and Carnival will continue to struggle with losses until there is a major shift in consumer spending or their core business model.
One stock that is really well positioned for both a better-than-expected US economy and an opening in China is MGM Resorts. The company owns just over half of MGM China, which operates two casinos in Macau and could be a big beneficiary of a more open China.
I think days like today are more noise than signal to investors because there are no stock-boosting earnings results like this or strong economic news. Investors are still speculating about interest rates on a daily basis, and moves in China are based on nothing more than hearsay.
Be selective when shopping at a market like this. Rising interest rates and even a global recession may be on the horizon. These will be headwinds for stocks, especially in the consumer discretionary part of the market.
Travis Hoium holds positions at MGM Resorts International and Peloton Interactive. The Motley Fool has positions in and recommends Peloton Interactive. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.
