VIDEO: We Have Margin Concerns for Food and Restaurant Companies
More December data point to sticky inflation, especially for food.
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In today’s Daily Rundown video, Chris recaps the portfolio's buy of more ServiceNow NOW shares Thursday, discusses two December reports that bring more evidence of inflation remaining sticky and why we are not bullish on restaurant and food companies.
As we discuss the December ISM Manufacturing PMI and December FAO Food Price Index findings, Chris lays out the additional inflation data coming next week with the December Service PMI reports and December wage data and explains why that will be of greater importance to the market.
Transcript
CHRIS VERSACE: Hey, folks. Chris Versace here Friday, January 3. And as you've probably noticed, the market is once again attempting to rebound today. And that's not only helping lift the portfolio, but it's also helping lift some of the positions that we added to over the last several days, last week and earlier this week, including yesterday's pickup of some additional shares of ServiceNow. In the alert, we talked about the rising expectation for further AI adoption in the enterprise, and we continue to think that ServiceNow is extremely well-positioned to capture that, but also the positive mix shift that happens with AI adoption inside of ServiceNow and how that can drive greater margin leverage and drop more EPS to the company's bottom line. So combined with the recent sell-off in ServiceNow shares, we saw that as an opportune time to pick up more for the portfolio, and we did.
Now, in our opening comments today, we explained why we're not going to be overly concerned on targets for the S&P 500 for 2025, largely because of the number of moving parts in pieces ahead of us when it comes to the economy, monetary policy, the geopolitical landscape and other uncertainties, including those uncertainties that could emerge with the soon-to-be-reinstated Trump White House. Instead, we will continue to utilize the tools and the strategies that have worked for us, making adjustments as new data and insights are had. In other words, folks, business as usual.
Now, with that in mind, I want to cover two pieces of data that were out today. The first is the ISM manufacturing PMI for December. There were some positives in the data, no question. New orders rebounded above 50 for the first time in months. The backlog of orders and manufacturing production rose as well. Now, those should result in positive revisions for December quarter GDP expectations, as well as potentially give a little bit of early lift to initial forecasts for the current quarter in some of those rolling GDP models that we talk about, like the Atlanta Fed GDP Now model.
However, there were also some not-so-positive data points. First, employment slowed in the manufacturing sector, but it did fare a little bit better than it did in September and October. So down compared to November, but still better than what we saw September and October. However, the prices component-- and you know we watch this very carefully-- it came in at a reading of 52.5, the highest level in several months. And when we factor that into what we saw yesterday in S&P Global's December Manufacturing PMI Report, the final version, it tells us that inflation is indeed sticky.
So that's the first data point. The second data point was in the December FAO Food Price Index. Now, we don't talk about this all that much, but you'll remember that when we downgraded the shares of PepsiCo to a 4 rating, we talked about the upward trend in food prices and the concern we had for margins on food companies and restaurant companies. Well, we got the December data in, and on a year-over-year basis, the overall index was up 6.6% year-over-year, continuing the sequential increases on a monthly basis. And we also saw notable increases in December in meat, dairy, and vegetable oil. Bottom line, we continue to see margin pressure ahead for food companies and restaurants that can't pass through more price increases, or ones that are using discounting to drive traffic and sales. So for now, we're going to continue to avoid those particular segments of the market.
Now, to some extent, yes, those two inflation data points in the December Manufacturing PMI and the December FAO Food Price Index, they go in hand in hand. But as we discussed yesterday, it will be next week's December Service PMI data that will be much more important. Remember, the services sector accounts for about 85% plus of GDP. And it's been the service sector and inflation in it that has been the fly in what we can call [LAUGHS] the Fed's-- excuse me-- inflation ointment.
Next week also brings a look at December wage data. And as we've talked about with you before, there's a yin and a yang when it comes to wage data. To the extent that wage data is rising, that is somewhat inflationary.
But at the same time, to the extent that we have real wage growth, meaning wages are growing faster than inflation, that's actually a positive for consumer spending. So we're going to have to walk that tightrope with the wage data next week and see what it tells us. But the bottom line is we are going to have a lot more inflation data to chew on next week, which also means that the Fed is going to have a lot more to chew on next week.
Also next week, we see the return of Fed heads to the center stage. I believe we have three or four of them speaking next week. We might even have one or two of them speaking over the weekend.
So we'll be collecting their comments. And as we digest all of that data, if we need to make any moves with the portfolio, you know we will. But please be sure to check your emails, your Alerts, so you can get our latest thinking as this data comes out. And if we have to make any trades with the portfolio, well, we want you right there with us.
And with that, I will say, have a wonderful weekend. I understand temperatures, depending on where you live in the US, especially on the East Coast, are really going to drop. There's rumors of a polar vortex, so please be careful out there.
And for the folks that are going to be getting this big swath of snow and ice, this whole kit and wintry caboodle, as it were, please be careful. Don't hurt yourself. But have a good weekend nonetheless, and I will see you back here on Monday.
At the time of publication, TheStreet Pro Portfolio was long NOW.
