Meme Stocks, The Sequel

Key Takeaways

• GameStop and AMC Return
• Economic Data In Line With Forecasts
• Cisco Systems Earnings After The Close

Both the S&P 500 and Nasdaq Composite closed higher on Tuesday by 0.5% and 0.75% respectively. A stronger than expected Producer Price Index (PPI) initially sent markets lower; however, comments from Fed Chairman Powell later in the morning helped assuage investor fears that the Fed was reconsidering an interest rate cut.

Most of the market’s attention the past couple days has been centered around the return of meme stocks. GameStop
GameStop
along with AMC Entertainment
AMC Entertainment
have garnered most of the headlines, however, other stocks such as Koss Corporation and SunPower Corporation have also made staggeringly higher moves.

As a long time veteran of the industry, it is hard to justify price moves of this magnitude. While the meme phenomenon generates a lot of market engagement, which I think is ultimately a good thing, I would also caution investors that the volatility in these stocks is extreme. Just to provide an example, GameStop has an expected move by Friday of $24.60 on a closing stock price of $49.45. From a valuation perspective, at one point on Tuesday, the market cap of GameStop was greater than that of Walgreens. It was also trading with a P/E multiple of ~1200. What that means is, investors buying the stock are paying roughly $1200 for every $1 in earnings. By comparison, the S&P 500 has an average P/E of 18 over the past decade. Therefore, if you’re planning to trade in any of these stocks, I would just keep position sizes very small. If this is not part of your normal game plan, then it is a speculative part of your portfolio. There is nothing wrong with speculation, the key is keeping the percentage of your assets that you allocate per trade or per name under control.

As earnings season winds down, focus is shifting back toward economic data. Yesterday’s stronger than expected PPI report caught many analysts by surprise, especially in light of April’s weaker than expected jobs report. While speaking yesterday, Chairman Powell did say he eventually thought rates would come down, though he was noncommittal as to when that might happen. According to the CME Fed Watch Tool, markets do not expect a cut until September.

However, this morning’s Consumer Price Index (CPI) and Retail Sales reports may help bolster the case for cuts. On a month-over-month basis, CPI was higher by 0.3% compared with estimates of 0.4%. Core
Core
CPI was in line with expectations of 0.3%. On a year-over-year basis, Core CPI increased 3.4%, also in line with forecasts. Retail Sales, which were expected to increase by 0.4% from March to April actually came in flat while Core Retail Sales were in line with estimates, up 0.2%.

Elsewhere yesterday, the White House said President Biden is planning to increase tariffs on China. According to The Wall Street Journal, steel and aluminum will have their tariff rate increase from 7.5% to 25%. Solar cell tariffs will double to 50% from 25%. Also, a new 25% tariff will be imposed on shipping cranes. Those tariffs follow news President Biden plans to raise tariffs on Chinese electric vehicles to 100%. In response, China said they will take actions to defend their own interests and it’s largely expected that retaliatory tariffs will be announced.

Both President Biden and former President Trump are talking about higher tariffs if elected. Protecting American jobs and industries is certainly important. However, tariffs are normally inflationary and right now, the market is looking for signs of easing inflation and interest rate cuts. Therefore, you have a conundrum and I would not be surprised if ultimately, it causes the Fed to hold off longer than many hope on cutting rates.

After the close today we have earnings from Cisco Systems
Cisco Systems
. That stock is down 3% for the year and this is a company whose earnings calls I pay close attention to because they have such a large worldwide presence. Then tomorrow before the open, Walmart
Walmart
reports their earnings. As one of the largest retailers, I find Walmart’s outlook on consumer spending to be particularly insightful and in light of today’s Retail Sales

Finally, for today I’m watching to see if stocks can hold their gains following this morning’s economic news. Bonds and stocks are both higher in premarket and volatility is down 3% with the VIX trading just about 13. We do still have members of the Fed speaking later today and that could introduce a bit of volatility. Looking out to the rest of the week there is more…