Stocks got pounded today following better-than-expected jobless claims data, which initially sent bond yields higher.
The S&P 500 dropped 3.8% to 2581.00, while the Dow Jones Industrial Average tumbled 1032.89 points, or 4.1%, to 23,860.46. The Nasdaq Composite slumped 3.9% to 6777.16. The 10-year Treasury yield rose 0.008 percentage point to 2.851%.
It was an ugly day. But consider this: The Dow Jones Industrial Average is still up 19% during the past 12 months, even after it dropped below 24,000 today:
This correction is the first since the one that ended in mid-February 2016--and perhaps a reverse of it. Back then, investors had been worrying about falling oil prices, a tumbling Chinese renminbi, and a possible recession in the U.S. Now, it appears that the market is worried about an acceleration in global growth that results in rising inflation. The fears were proven wrong in 2016.
Will they be proven wrong now? —Ben Levisohn
On a day when the S&P 500 dropped 3.8%, you might expect all the stocks in the index to finish the day lower—and most of them did. But 16 managed to finish the day higher, including Viacom (VIAB), Kellogg (K), Philip Morris International (PM), and Tyson Foods (TSN), all of which reported earnings since yesterday's close.
No stock performed better than Coty. Its shares gained 14% to $19.96 today after reporting an adjusted profit of 32 cents a share on sales of $2.64 billion. Analysts had predicted earnings of 23 cents a share on sales of $2.48 billion.
Coty probably got a boost from the fact that it had gotten hammered heading into earnings. "Shares were very weak into the print and given the solid top-line beat, we would expect a strong relief rally today," wrote Wells Fargo analyst Joe Lachky in a note this morning.
On a day with almost none, we'll consider it a relief. —Ben Levisohn
By the looks of Hanesbrands' (HBI) gain yesterday, investors were expecting some good news from today's earnings. Oops.
Shares of Hanesbrands dropped 11% to $19.57 today, making it the worst-performing stock in the S&P 500. Hanesbrands reported an adjusted profit of 52 cents a share, meeting analyst forecasts, on sales of $1.65 billion, narrowly beating estimates for $1.63 billion. Unfortunately, Hanesbrands said it would earn between $1.72 share and $1.80 a share on sales of $6.72 billion to $6.82 billion. Analysts had been predicting a profit of $2.04 a share on sales of $6.63 billion.
Bears would say that Hanesbrands is facing increased competition from the likes of Amazon.com (AMZN), which is offering its own version of Hanes underwear, and from the collapse the various distribution channels it used to boost margins. Some, however, see better times ahead. " While there will be some near term pressure due to investments to drive future growth, we believe HBI will return to margin expansion in 2H and work back towards mid to high teens op margin," B. Riley FBR analyst Susan Anderson wrote in a note this morning. "We would be aggressive buyers of HBI shares at 9.8x FY2 EPS and a 3% dividend yield." —Ben Levisohn
U.S. tax reform will only provide a moderate benefit to company debt ratings, according to a new analysis by S&P Global. While lower taxes will obviously help cash flows, S&P found that less than 10% of ratings are likely to change as a result.
Why is the corporate tax boon not so much of a boon from a debt perspective? First of all, many corporate borrowers aren’t actually receiving a 14-percentage-point drop in their taxes, because they were already capitalizing on deductions and deferrals to pay something closer to 22%. S&P also expects companies to use the extra cash for dividends and buybacks, acquisitions, or capital investments, instead of paying back debts and improving their credit profile.
So, through a credit-market lens, the net benefit of tax reform will probably be meh. “Reform-related ratings changes of more than one notch will be rare, and upgrades and downgrades are both equally likely,” the S&P analysts wrote. Ratings changes “will most likely result from secondary effects revolving around financial policy,” like activists pestering companies into returning the extra cash to shareholders, they wrote.
The main beneficiaries will be those who need it least: “the strong getting stronger,” as S&P put it. “We expect that the majority of investment-grade issuers won't meaningfully alter their financial priorities or leverage tolerance levels in pursuit of a higher rating,” they wrote. Meanwhile, “highly leveraged borrowers will benefit little.” But for those more troubled companies, whose earnings are less than double their interest, S&P sees the impact on their funds as neutral to negative.
One interesting twist: New limits on interest deductibility seemed like an obvious negative for high-yield companies. But S&P thinks it might not be that bad. About 30% of the companies they rate high-yield don’t pay taxes anyway thanks to net operating losses. That said, the changes may have them running through those offsets faster. — Mary Childs
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