The Daily Breakdown examines Wednesday’s stock drop and a trade on homebuilders.
Thursday’s TLDR
- Stocks take another hit after strong retail sales.
- Housing data brings homebuilders into focus.
- Spirit Airlines shares plunge 58% in two days.
What’s happening?
Stocks dropped again yesterday, with the S&P 500 registering its worst decline in two weeks. December retail sales data came in surprisingly strong, with control group sales rising at the fastest year-over-year pace since February 2022.
This is good news, especially in the context of an economy under a lot of pressure from interest rates. A recession is the big risk on the table, and it’s hard to have a recession when people are spending money at that clip.
But it wasn’t enough to satisfy traders looking for several rate cuts this year. For what it’s worth, I think the overheating economy arguments are getting weaker by the day, so hopefully investors will see strong data as a good thing soon. For now, though, we continue to play the rate cut guessing game.
China’s growth concerns flared up yesterday, too. China’s GDP rose 5.2% last year — a decent showing, but not enough when you’re an economy that grew at a 7.7% clip in the 2010s. Keep an eye on China, and remember that nearly one-third of S&P 500 companies rely on revenue from the Asia-Pacific region. Global headlines matter.
The setup
The historically awful housing market has gotten a little less awful as of late.
30-year mortgage rates have dropped from 8 to 7% over the last three months. It’s not much relief, but it’s enough that it could inject some life into home sales and construction.
Investors seem to think so, too. S&P 500 homebuilders, which include NVR, PulteGroup, and Lennar, have soared 40% since the end of October.
That thesis will be tested today and tomorrow, though, with a flurry of housing data coming out over the next few days. Yesterday, we saw that homebuilder sentiment rose its most in 11 months in December. Today, we’re digesting building permits and housing starts data.
So let’s take a look at DR Horton, the largest homebuilder in the S&P 500.
The shares have been on a tear as of late, but they’re about 8% above the 50-day moving average. While lower rates should help thaw a frozen housing market, that hypothesis may already be baked into homebuilder stocks.
Watch the $146 level in DR Horton — the 2024 intraday low for the stock. If DR Horton breaks that, the 50-day moving average at $138.45 may be in play.
Want to receive these insights straight to your inbox?
What Wall Street is watching
SAVE: Spirit Airlines plunged the most since March 2020 after a federal judge blocked the planned merger between Spirit and JetBlue. Some analysts now suspect that the Spirit could potentially face bankruptcy. Shares of JetBlue dropped 8.7% on the news.
CAT: Caterpillar shares slid the most since October after China’s disappointing GDP report. Caterpillar derives about 20% of its revenues from the Asia-Pacific region, so China’s slowdown could have an outsized impact on the machinery maker.
PYPL: PayPal was the best-performing Nasdaq 100 stock yesterday, buoyed by comments from CEO Alex Chriss that the payments vendor is looking to shed unprofitable business lines.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.