Wall Street Lunch: Ghost Of Stagflation Alarms Investors
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ISM shows surge in prices and weaker manufacturing activity. (0:15) AbbVie gets into weight-loss game. (2:16) Close, but no cigar for Philip Morris? (3:24)
This is an abridged transcript of the podcast:
Our top story so far. The stagflation specter is spooking traders today, wiping out the risk-on move that was buoying stocks and weighing on bonds following the weekend surge in crypto.
The February ISM manufacturing index brought with it a “whiff of stagflation risk,” economist Mohamed El-Erian said, falling more than expected to 50.3 from 50.9 in January. That’s barely in expansion territory and lower than the 50.6 forecast.
New orders fell to 48.6 from 55.1 and the employment component dropped to 47.6 from 50.3.
At the same time, the prices paid component surged to 62.4 from 54.9. That’s the highest level since 2022 and raises “questions about the potential for these increased production costs to be passed through to consumers in the form of higher prices,” El-Erian said.
Wells Fargo economists noted that the headline index only avoided falling into contraction territory due to wait time as supplier deliveries shot up to 54.5.
“This was the broadest indication of wait-times since the supply chain disruption year of 2022,” they said. “Longer wait times for supplier deliveries are additive because in normal times such a development is associated with a factory sector that cannot keep up with demand. Since that is not an accurate characterization of what is contributing to wait times today, the ‘expansionary’ signal from the ISM should, for this month at least, be taken with a massive grain of salt.”
Pantheon Macro economist Oliver Allen says, “some of the earlier increase in the ISM manufacturing index from October to January reflected manufacturers hurrying to complete orders before tariffs are applied, a rush that now seems to be petering-out.”
“The simultaneous marked upturn in several measures of investment plans was a positive sign, but intentions seem to be flagging again now in the face of much greater uncertainty around trade policy, the DOGE cost-cutting drive, and European demand for military hardware. We see the manufacturing sector continuing broadly to stagnate over the next few quarters.”
Among active stocks, AbbVie (ABBV) has entered into a license deal with Danish biotech Gubra A/S to develop Gubra’s experimental obesity treatment.
Under the terms of the agreement, AbbVie will lead development and commercialization activities of GUB014295 globally. The partnership marks AbbVie’s foray into the obesity field.
Kroger (KR) announced that Chairman and CEO Rodney McMullen has resigned from the company following a board investigation of his personal conduct that was inconsistent with the company’s policy on business ethics.
The grocery store chain said the board was made aware of certain personal conduct by McMullen on February 21 and immediately retained outside independent counsel to investigate, which was overseen by a special board committee. While no specifics were given, it was noted that McMullen’s conduct was not related to the company’s financial performance, operations or reporting, and it did not involve any Kroger associates.
And Domino’s Pizza (DPZ) officially announced that it will sell stuffed crust pizza to compete directly with Pizza Hut (YUM) and Papa John’s (PZZA). As of Monday, the Domino’s $9.99 carry out deal included a Parmesan Stuffed Crust menu option.
It’s also declaring this week National Stuffed Crust Week.
In other news of note, Philip Morris International (PM) may be looking to sell its U.S. cigar business.
The cigar business was picked up by Philip Morris as part of the deal to acquire Swedish Match AB in 2023. Brands include Garcia y Vega and White Owl. Sources indicated to Bloomberg that a potential sale is part of the company’s strategy to focus on smoke-free products and reduce reliance on traditional tobacco-based products.
Currently, Philip Morris is working with advisers to determine buyer interest. A deal price of more than $1 billion is anticipated if a deal happens.
The company said: “In 2024, we announced a strategic review of our US cigar business. We have no updates at this time.”
And in the Wall Street Research Corner, the Goldman Sachs equity team says it continues to recommend investors owning healthcare stocks.
Strategist David Kostin says, “Healthcare (XLV) offers a defensive tilt and trades at historically low valuations despite outperforming the market by 7 pp YTD.”
Goldman’s screen returned 41 stocks that have outperformed the median S&P 500 stock since the February 19 S&P peak.
“The median stock in the lists trades at a 20% P/E discount to the median S&P 500 stock (15x vs. 19x).”
Among the picks are Baxter (BAX), Merck (MRK), Bristol-Myers (BMY), Eli Lilly (LLY), J&J (JNJ) and Medtronic (MDT). Check out all 41 names.