Stock market week ahead: forget FAANG, it’s all about LVMH

In short: our weekdays are filled with photos of traders holding their heads in their hands at the New York Stock Exchange, and our weekends have been filled with photos of models Kanye West and Balenciaga stomping through the narrow alleys of. .. this same purse. .

And why not? U.S. luxury spending was 47% higher in 2021 than before Covid 2019, while jewelry spending was 40% higher, according to data from Bank of America. Nor is the general stock market chaos a headwind, they say.

“We believe that many investors believe that demand for luxury goods in the United States is strongly correlated with stock market performance, because a large part of household wealth is tied to this asset class,” wrote the analysts at Bank of America in a recent note. But this is far from the case: data from the bank showed that in the 10 years before Covid, the correlation between luxury spending and the S&P 500 was less than 30%. There was no correlation between the price of cryptocurrency and luxury spending.

“Very strong demand from US luxury customers was the biggest positive tailwind in 2021. The strength continued in 2022 despite a more complex macroeconomic backdrop. Demand for luxury from high-income consumers is accelerating, which which we attribute to reopening and more shopping occasions (returning weddings, galas, parties, etc.),” they wrote.

If there was a Walmart vs. Weitzman game today, the luxury shoe brand would take the belt. Walmart and Target felt the brunt of rising inflation and supply chain issues.

“Inflation levels in the United States, particularly in food and fuel, have created more pressure on the mix of margins and operating costs than we anticipated,” the CEO said. Walmart’s Doug McMilon after the company reported weaker-than-expected first-quarter results and cut its full-year profit forecast. Last week.

Walmart stock was down more than 18% for the month and Target was down nearly 30%. In contrast, Moet Hennessy Louis Vuitton (LVMH) fell just 5.6%, Burberry is up more than 8% and Tapestry, the company behind Coach, Kate Spade and Stuart Weitzman, was up more than 2%. %. The S&P 500 is down about 3% for the month.

While the West presents good news for luxury brands, the Covid-related shutdowns in China have however raised some concerns. China’s strict lockdown measures in response to the latest Covid outbreak have shuttered luxury stores and left goods meant to be shipped around the world stranded in Chinese ports. But increased demand in the United States and Europe has offset those losses, Ferragamo CEO Marco Gobbetti said on a recent conference call.

The second quarter is also less exposed to Chinese consumption as there is less travel and fewer shopping holidays, giving luxury brands some breathing room as Asia begins to lift restrictions again. The hope is that by the third quarter, Chinese consumers will return to “revenge shopping” from pent-up demand during the shutdowns.

Yet luxury stocks are priced as if they were in a recession, Bank of America analysts wrote. “The luxury goods sector continues to be under pressure due to the increase in Covid cases in China,” the note said.

There have been six previous luxury industry setbacks over the past two decades: the 2000-2001 dot-com bubble, the 2007-2009 global financial crisis, the 2013-2014 Chinese anti-corruption campaign, the hostilities Sino-American trade in 2018, the Covid pandemic; and the announcement of China’s common prosperity in 2021.

These setbacks became shorter and less severe over time. The first three pullbacks, on average, led to a 52% decline from peak to trough over 85 weeks and took 119 weeks to return to the previous peak, BofA analysts found. But the last three pullbacks only declined by -22% on average in 8 weeks and took only 20 weeks to return to previous highs.

If the patterns remain the same, then “history shows that China’s Covid-related restrictions are not likely to destroy luxury demand, only to change the timing, and that a pullback in the stock price on this event (low multiple) would be a particularly good buying opportunity,” the Bank of America analysts wrote.

Available evidence may indicate that this downturn is not hitting all Americans equally. The recovery from the short Covid recession was what people call K-shaped. It happens when distinct communities recover from an economic downturn at varying paces. Some sectors of society may experience renewed growth while others continue to lag.

Growth in US fashion luxury spending increased across all income groups in 2021 as the economy recovered from Covid shocks and markets soared. This was not the case in 2022. Growth in luxury spending was strongest among the high-income cohort, up 26% year-over-year. Low-income people reduced their consumption of luxury goods by 5%.

It’s impossible to draw conclusions from such a small sample of data, but the numbers suggest this downturn could be a repeat of the K-shaped recession of 2020, when many people who worked in white-collar jobs recovered quickly as the government handed out stimulus payments and shares. and appreciated house prices. Those with no savings and working in services continued to suffer, according to data from the Bureau of Labor Statistics.

Today, it looks like Walmart shoppers are being chimed in while Balenciaga shoppers are getting $800 NYSE shirts.

Republican senators hit back at ESG pressure

“With great power comes great responsibility” is a saying Spider-Man and the asset managers have taken to heart. Some Republican senators don’t like that, at least when it comes to asset managers.

Over the past few decades, investors have flocked to index funds that give them broad access to markets at accessible prices. Major asset managers including BlackRock, Vanguard and State Street have grown accordingly. Together, the three companies manage $22 trillion in assets. This equates to more than half the value of all stocks of all S&P 500 companies.

That’s a lot of money. And lots of sharing. And that means these asset managers have a lot of voting power over public companies.

Lately, they have used this power to advocate for ESG-friendly changes. They have pushed companies to diversify their management staff and boards, focus on environmentally friendly policies and invest in the workforce.

This year, BlackRock CEO Larry Fink asked companies to set short, medium and long-term goals to reduce their greenhouse gas emissions. “These goals, and the quality of the plans to achieve them, are critical to the long-term economic interests of your shareholders,” he said.

Alaska’s energy executives were unhappy with this pressure. They complained to their Republican Senator Dan Sullivan, who in turn introduced legislation that would allow individual investors in passive funds to have voting choices if fund managers owned more than 1% of a company’s stock. .

In other words, the investors who put the money in the funds, not the fund managers, would have the right to vote.

The bill is co-sponsored by 11 other Republican senators.

“The whole ESG movement doesn’t reflect what America wants,” Sullivan said in a recent “Squawk Box” interview. “Why should these three companies that have monopoly power be able to vote on all these stocks? It’s hugely distorting the market to have these three companies that have enormous, enormous power. They own 88% of the S&P. That’s a distortion of capital markets and that carries over to the energy policies that we are talking about.”

BlackRock said late last year that it would soon deploy technology to enable customer proxy voting.

Next

Monday: Memorial Day, US markets closed

Tuesday: Conference Board Consumer Confidence

Wednesday: ADP National Employment Report; Jobs at JOLT

Thursday: OPEC meeting

Friday: May unemployment report

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