Stocks Rally Even as Consumer Comes Under Pressure, And What to Expect from Netflix’s Annual Meeting 6/1/23

0:01Right now on fast, the unstoppable. Major averages keep powering higher despite new signs of Consumers tapping the brakes on spending and dealing with new headwinds coming from the debt ceiling deal in Washington. The bull bear tug of war straight ahead. Plus, cashing out why wealthy investors are pulling their money out of stocks and piling into cold, hard cash. The details on their slow money plays straight ahead. Plus, Apple closing in on new highs ahead of the big developers conference. Netflix surging before kicking off its shareholder median. Carvana keeps on trucking. What's behind their nearly 50 percent gain in just the past five days?

0:33I'm Melissa Lee. This is Fast Money. We're live at the Nasdaq Market Site. On the desk tonight, Tim Seymour, Karen Feynman, Dan Nathan, and Victoria Fernandez of Crossmark Global. We start off with new nine-month highs for the markets. The Nasdaq leading the charge up 1.3%, notching its highest close since August 16th. The S &P also hitting levels not seen since that month last year. The moves coming even as we see some signs of consumers coming under pressure. Dollar General with its biggest drop on record after the discount retailer slashed its outlook for the year, said its core shoppers rainy in spending.

1:04All this is we await tomorrow's jobs report, which is expected to show hiring slow to its slowest pace since December 2020. So will big tech's boom continue to boost this market or will consumer slowdown start to pump the brakes on this rally? It seems like these two things are going in parallel, Tim. It's fascinating because the retail performance, whether it's the XRT, we talk about that. But even some of these stalwart names that have been very defensive are giving ground. We're going to talk about Lulu, which is certainly overcoming what had been some tough price action. it's a combination of when you hear a dollar gen talk about the lower income consumer the reality is that the job market may certainly still be strong and we've got those jolts numbers yesterday but there are some heavy duty pressures on the consumer and let's not forget where inflation is hitting them hardest so it's it's fascinating i i think you know the the disconnect between what's going on with say the nasdaq and the dow there's a lot of different quotes at this the journal was quoting that that chasm between the performance of the Dow and the Nasdaq in May was the widest since October 2001.

2:07And I think Dan probably has some ideas about what was going on back then. I mean, in other words, it's the kind of stuff you saw right before things got kind of nasty. And I'm not going to say that, but the fact is that the consumer and consumption is the biggest part of our economy. We know manufacturing is deep recession right now. We got more data. Retailers not trading so well. Yeah. Dollar General, I mean, in terms of what they said that was so disturbing, They said that their consumer is trading down to food banks. I mean, things are so bad in terms of food inflation, the removal of the child tax credit, and a lot of other headwinds.

2:37Yeah, and I guess when you think about what's in this negotiated bill here, right, so the debt ceiling relief. I mean, and you brought it up earlier today. We were talking about it. I mean, like the moratorium on student. I mean, think about this. If you had student loans, you didn't have to pay it for the last three years, right? And so people who have student loans are probably an age group that maybe are not doing the smartest things with their money anyway. They're YOLOing trips to whatever. this, that, whatever. All of a sudden, this does have the potential to really slow down the pace of, you know, we went from the goods during the pandemic and the demand for them to services.

3:06And, you know, we're seeing that in a lot of companies, at least in the stocks, the way they've acted over the last couple of months, they've really slowed down a bit. And to Tim's point about that gap between, let's say, the NASDAQ and the Dow, that does bring us back to those periods right before, you know, the dot-com and the NASDAQ just imploded. And there's another stat here. If you look at the gap between the market cap weighted S &P 500 versus the equal, you know, the equal weight, it's basically flat on the year versus an S &P that's up 10.5%. The last time it was that wide was the year 1999, right?

3:38Right before we saw all those dynamics kind of shifting. So you can say, well, you know, these names are different. This is different this time. We had a nice little debate about this the other day on the show. The one thing I'll say is like the more stats that you read about what's powering this AI boom for all these big platform companies is that the cost to compute and then commercializing these things, it's really expensive, right? And so this is what we're seeing right now is the CapEx build into that. But once we don't have the ways that these companies can monetize it, I think you might see into a slowing economy, which is kind of clear what we have right now, you might see that spend pull back a little bit.

4:11And therefore, these largest names might pull back also. I guess I'm not seeing the spend pullback on anything AI related, right? I think that we're early in that. I understand the bubbliciousness of it, but to me, it feels pretty early in the bubble. And I think that when the bubble ends, it's going to be like, wow, all this money spent, but what do the buyers have for it, for building up this AI so much? Were they able to monetize it? I'm not sure. But the other part today, talking about the discretionary spend, the consumer really being heard, you know, Dollar General, but we also look at Macy's and Macy's really talked about a couple of things that I thought was interesting.

4:50The $75 ,000 and under consumer really sort of feeling the feeling the this tightness of, you know, inflation and maybe some uncertainty. And that's 50 percent of their consumers. Yeah. And so that was really important to them. And we think of Bloomingdale's without that was better. But so Macy's was weak. But also, interestingly, the quarter started out fine. And then mid-March, They cite mid-March, which was we know when SVB happened and the banking crisis started. And then I think there was in there April some residual banking crisis, but also fears about the debt ceiling. We don't know May.

5:24So I'm wondering if maybe we'll see a little bit of a bounce there. Some of the commentary hasn't been great about there being a giant bounce in May. But I thought it was interesting. Macy's has been down a couple of times on others missing, including Capri, which we know is a big wholesaler to Macy's. And yet they were able to actually turn it around. And so, you know, bad news, decent price, decent price reaction. That would have been like a guy thing. I thought that that was sort of I don't know. I guess I'm trying to look for something hopeful from the consumer that I think is still is still there.

6:01Yeah. Victoria, how do you think about the consumer and whether or not, you know, this AI led tech rally that we're seeing, if it can go on in the face of headwinds to the consumer? So I think I'm going to try to bring a little bit of that hopefulness for Karen here. You know, Dan's talking about the dichotomy that we're seeing between the NASDAQ, the cap weighted S &P, the equal weighted S &P. I think you see that same dichotomy within the consumer space. So you look at those higher income consumers, we'll talk about them a little bit in regards to Lulu later, but look at the lower income versus higher income.

6:37Dollar general, as you mentioned, going down to the food banks from them, whereas the higher income consumer is still spending, maybe not quite as much. Maybe they're going down the cost scale a little bit, but let's look at where the consumer sits. Their savings rate, except for the last reading we got, the whole rest of 2023, savings rates have gone higher. so they have a little bit of cushion. Quit rates are not quite as high, so it's telling us maybe things are starting to stabilize there, which means wages will start to stabilize. If inflation is coming down, then that's going to help income, real income for them.

7:13And let's look at oil prices. Oil is now 190 days in a row below its 200-day moving average. That's the fifth longest trend we've seen. If that flows through to gasoline prices, disposable income goes up for consumers again. So I do think there's a little bit of optimism here that the consumer can hold on. I think you need to play it maybe with some of the discount stores where higher income consumers are moving down as we go through the rest of this year. You know, it's interesting when you come to discretionary, there's three stocks that really stick out. And I know that Nike is trading up in sympathy right now with Lulu in the aftermarket.

7:48It was down 20 percent in the month of May from its highs. Starbucks was down 15 % in the month of May from its highs. Disney, now I know they had earnings, was down 15 % in the month of May from its highs. And so when you think about what we're talking on the low end, and then let's say that is kind of a mid-range, but it's very discretionary to the high end, you know, I mean, sometimes you have to look at the stock market and see what it's telling you a little bit. And so, you know, it's interesting. So you see all this other stuff that's YOLOing, literally, I mean, I can't believe we're still talking about Carvana.

8:17It's a zero, You know what I mean? But we're talking about it because it's up 50 percent. And who's buying it? You know what I mean? And Upstart. Remember that one? We don't know what it does, but it went up. You know, this now whatever. We're talking about that again. It's up 300 percent for whatever. So I think there's a lot of behavior that's going on in the stock market, which should not make you feel bullish, in my opinion. And then look at three companies that we all engage with on a daily basis and look at the stocks of those company and look how they're trading. And so to me, I would actually almost put some more weight in those in the price section we've seen in the last month.

8:45Well, you know, I'm sure Nike and to me, it's a valuation call. There's nothing broken about Nike. It's a company I've loved forever, mostly been on the long side. I just think that the multiple got to be a place where why am I paying more for Nike in this environment with rates 500 basis points higher? A lot of pull forward other than Dan, who probably has a different pair of sneakers for every day of the month. You know, I don't. And at some point, you know, having bought four or five during COVID, because why not? I'm pretty much tapped out. But, you know, Starbucks went 22 percent or so into that high before it pulled back and gave some numbers.

9:15And I think to me, again, it was I think Starbucks, we've I've lamented the inflation at Starbucks. I'll say this. There's a lot of these companies. And I think it's CMG. I think it's Starbucks. I don't think they're going to be able to pass on prices the way that they have been. And that's been the glory train for them over the last two years. We just talked yesterday about how everything is coming down. All these prices are coming down in terms of disinflation. Absolutely. Prices, raw materials or prices like inputs, inputs, inputs, inputs. Yes, yes, yes. Inputs. I guess it's a matter of whether or not companies are going to pass.

9:44There's greedflation. But I think, look, at 95 bucks, I want to own Nike again. And I think there's a place where at Starbucks, you know, around 95 bucks, we're getting close. It was trading up to 118, 119. These companies, I think, didn't deserve those multiples. But when you pull back that multiple 20 to 25 percent, I just think there's a lot of rotation. I feel like there's sort of an embedded China play in there. They were all hyped up on the reopen. Right. And then that sort of fizzled. And so I think that was part of what brought Starbucks down and Nike down. And so I wonder, I don't know if you're if you're bullish on China, which I think you are.

10:23Right. Is this sort of an mildly? I mean, I just think we have had a voracious risk on appetite for markets. And you don't reach out and grab Starbucks, you know, in that environment. And I'm just talking about the character of the market here is such that whereas six weeks ago, people very bearish pessimists looking for health care, looking for staples, looking for these places to hide out. And I think, right, no one wants to hide out right now. In fact, professional managers are behind the curve if they've missed this rally. All right. For more on consumer spending slowdown, let's bring in Greg Dacco, chief economist at EY.

10:54Greg, great to have you with us. How do you think about the consumer and the headwinds that we're hearing about from retailers, and yet we have a market that seems to be raging because of this AI boom? Well, I think what we're seeing is a story of nuance. We are seeing a retrenchment in, no retrenchment really in consumer spending, but we are seeing softening momentum when it comes to spending activity. If you look at some of the drivers of consumer spending, there are an increasing number of headwinds. We're still in an environment of high inflation, and more importantly for consumers' high prices, we have high interest rates, and we have fundamentals that supposedly drive consumer spending that are softening.

11:33The labor market is cooling. We're seeing increased evidence of excess savings being drawn down. And we have credit conditions that are tightening. Those are all headwinds for consumer spending. We also have the end of the student loan moratorium. As you mentioned, you know, higher rates, credit tightening, etc. How do you sort of parse out that versus the disinflation that we've seen in raw materials? And it's pretty significant declines that we've seen across the board, whether it be food or energy or metals. I think we are seeing more and more disinflationary momentum across the economy. I think we have to be careful not to pull out the old playbook when it comes to trying to evaluate the likelihood of a recession in this type of environment.

12:17There are unique characteristics in this business cycle. But as you alluded to earlier, we are seeing signs that goods price inflation, commodities price inflation, they're all cooling and cooling rapidly. And I wouldn't be surprised to see more disinflationary wins when it comes to some of the service sector activities, including housing and even travel. Because at these prices, this is preventing some consumers from traveling and from enjoying leisure activities. So I would expect that as we look into the next six months and into 2024, we're going to see slower consumer spending, not a retrenchment again, but slower consumer spending will bring about gradually slower demand overall and less inflationary pressures.

13:01And I wouldn't be surprised that disinflation surprises us to the downside. Greg, why not deflation? You know, I mean, how about getting back to a place where we were pre-COVID? I mean, all of the COVID pressures are going to go away. We've seen this on supply chain. We've seen this on reopening. It's all taking a lot longer than expected. But remember, the problem in 2018 was deflation. The Fed was having trouble getting to 2%. And, you know, maybe that number was never right. And we all know where the labor market is. And we all, at least on this desk, tell you we think that's very lagging. Why not deflation?

13:32I mean, why are we not going to go back to where we were? Why has the world suddenly changed? Well, I don't necessarily think that we're going to be experiencing deflation in the sense that deflation is an environment where prices are falling. That generally coincides with an environment that is recessionary and severely recessionary. If we were to get back to an environment where inflation is stable, let's say back around 2%, that would be good enough because it would give the Fed the impression that essentially there is that price stability element with sustainable growth and sustainable price acceleration.

14:06That would be the type of environment that the Fed is aiming for. Deflation would really be an environment where we see, if it's broad-based, really a retrenchment in private sector activity. That's not really what we want to be seeing. We're still aiming for that soft landing, that environment where inflation comes down without creating a recession. I think the landing strip is really short and narrow. There's still a possibility of a soft landing. But increasingly, we're seeing that there are decisions that are being made that are nonlinear. You're not just looking at businesses and consumers deciding to spend a little less or invest a little less, but actually stop investing or stop spending, especially for lower end consumers.

14:46And that can be a real risk for the U.S. economy. Greg, thanks. Greg Daco. Thank you very much. Victoria, I mean, I think that's an important distinction. Call it whatever you want. What consumers are actually doing is really what matters. It is. I mean, that's the majority of our economy is what the consumers are doing. So you have to focus on it. And as we were talking a little bit earlier, and as Greg mentioned, it's not that the consumer is going away. You know, the Fed talked a long time about kind of destroying demand. And we needed the consumer to actually kind of fall off the edge of a cliff is what a lot of people were saying.

15:21And that's just not going to happen. I think there was people underestimating the strength of the consumer and the savings that they had built up during COVID. So now they're there. They're going to continue to spend, but at a lower price range than what they were doing before. And I think that's what Greg is alluding to. I think that's what is going to keep us from going into a bigger recession than what we would otherwise. I still think we're going to get a mild recession at the end of this year, but it's the consumer that's going to keep it mild at that point. And I think as you talk about stocks around the consumer, yes, everyone loves the AI stocks, and that's what's driving the market right now.

15:59But you have to look out towards the end of the year and say, how can I capture a little bit of this consumer spending that we're going to get? And I think that's a name like a TJX. Maybe you look at housing. Housing has been up as of late. Perhaps you play that a little bit with a name like Lowe's. I think you can find opportunities and not just leave the consumer in the dust. All right. Meantime, we've got an earnings alert on Lululemon. Shares soaring after a top and bottom line beat. The athleisure brand also seeing accelerated sales in China, issuing strong full year guidance. CNBC's Seema Modi has been listening in to the conference call.

16:31Seema, what's the latest? Melissa, I have, and so far, no comments about a consumer pullback. CEO Calvin McDonald started the earnings call really touting the strength outside the U.S., with international sales increasing 60 percent year over year, led by a meaningful acceleration, yes, in China, where it saw revenue increase 79 percent. McDonald, in fact, just returned from Shanghai, where he said he was impressed by the positive reception of the Lulu brand on the ground. If we break down the categories, women's category up 22%, men's up 17%, while accessories were up 67%, which McDonald's says is the smallest of the three categories.

17:10However, he's optimistic about the runway for accessories, including backpacks and footwear. Lulu also continues to build out its tennis and golf wear. He also called out the growth in women's bottoms up 22 percent, driven by its dance studio pant. Taking a look at shares of Lulu underperforming this month. But as you can see, surging in overtime by 13 percent. Mel? Seema, thanks. Seema Modi and don't miss a post earnings interview with Lululemon CEO Calvin Harris. It's walking the street tomorrow in the 10 a.m. hour. Karen, would you like me to address the growth of women's bottoms? Is that what you're after?

17:47Better you than me. Women's bottoms. Right, right. You know, I like Lululemon. I haven't been in it for a while. I actually thought they weren't going to have a stellar quarter, so I blew it. I missed this one, but I actually think it's a little bit more expensive now up here, up, you know,$30. I don't know where it is right this second. I really thought that we would see more pressure, but they've done a tremendous job again. I mean, raising guidance when you don't have to right now, right? It's kind of easy to just not do it. So they must feel very confident. So good for them. I might have missed this one yet again.

18:24Too expensive. But is this really going to get away from you? I mean, the way I look at it is, I think, is great. They're very much like Nike. They have pricing power. Look at that operating margin was 20%. They're holding China's growth. They're getting different segments. They have men. Dan, anytime soon. I'm wearing them. Atta boy. I'm wearing them. Nice. So we're working out a little bit, obviously. Obviously. No, people have been talking about it. So, I mean, I think you got a case here where, but why would this get away from you? This is my point. There's no reason that I think you need to pay more than 30 times.

18:57And I think that's kind of the story. This stock also was off 17 % into this print. The reaction is not that big of a surprise. If Lulu can come up with a pant, like the men's pant, because men were wearing the Lulu pants to work. Yes. For women that you can wear to work. Interesting initials on that men's pant. I'm always looking for a better bottom. That's for sure. No comment. Mornings action after the break. Broadcom on the move after reporting details from the quarter next. Plus, could an apple a day mean all-time highs are on the way? Shares nearing a record as the Tech Titans Developers Conference is just days away.

19:29The hype ahead of this event is all about a new VR headset. Don't go anywhere. Fast Money is back in two.

19:41Welcome back to Fast Money. Earnings alert on Broadcom. Shares of the chip stock volatile despite an upbeat Q2 report. Broadcom also projecting year-over-year growth in the current quarter as it ramps up its investment in, what else? AI. Christina Parsenevilles has the latest. Christina. Well, Broadcom shares actually did a complete turnaround. They were negative when the earnings came out, but CEO Hawk Tan took the mic on the analyst call and weighed in, of course, like you said, on the impact from AI-related sales. Tan said that in fiscal year 2022, AI revenue was 10 % of total revenues. Right now he's saying it's 15 % and he anticipates AI revenues to contribute more than 25 % of total revenue by end of fiscal year 2024.

20:22Tan saying, quote, in fiscal Q3, 2023, remember that they're in Q2 right now, or they just posted Q2. He said, we expect that this revenue to exceed 1 billion in the quarter. So that number 1 billion is up from the previous$800 million benchmark. Management also believes that quarterly revenue could double by the end of this year. Considering Broadcom makes custom chips for Google, Meta, and recently signed another multi-billion dollar partnership with Apple, those details for that Apple deal have been scant thus far, which is why investors definitely want to hear about it on the call, which is still underway.

20:55One thing we just found out, too, is that Broadcom, we know, is trying to acquire VMware, but has hit a lot of hurdles with regulators. Tan just said that he believes that deal will close this year. He said the same thing last earnings call, too. Mel? Christina, thanks. Christina Parts Nevelis. Tim, where do you go on Broadcom? Well, the stock's doubled since October. I get the secular dynamic here where essentially customized chips, the asset space, they and Marvell are the two monsters, and their customers are a who's who of every – I mean, we're talking Apple. We're talking Google. We're talking Meta.

21:27We're talking all those folks. And they are able to do – they're able to lower power dynamics, be more efficient. That's kind of where they sit, and they will continue to be a leader. I just get back to what do you want to do at this point? And I think the best part of this investment cycle for these stocks is you're waiting. You're not chasing it. Yeah. Dan? It's funny. A lot of people were chasing last week. You saw the way the stock traded. It traded like nine and a quarter. I mean, this was like three trading days ago, reverse that whole move. And here we are just under$800. I know it's trading up a little bit now, but it's interesting what Capehart said, until they actually said or gave some guidance about that 15 % of their chip revenue that is going to go to 25%.

22:08Again, this is a company that's expected to do$35 billion in sales. When you think about market cap terms, what's going on here, it doesn't make a lot of sense unless you can forecast that sort of growth out for much longer than just a couple of quarters. Because I think that move from 700 to 925 last week incorporates that. I also think, and I don't know if you guys talked about C3AI last night, you know, listen, I think the fever is breaking in some of the names that don't have the direct thing that you can put the finger on. If you can't guide the way NVIDIA did last week, so some of these other names.

22:41Let's see how Broadcom closes tomorrow, because I think that could be a really important part. You also saw how Marvel reversed some of those games last week, too. If you can't guide a 50 % increase in your revenue forecast, then you don't get any AI appreciation. I mean, listen, but again, I know I was a little heated on Tuesday or whatever day it is. You know, again, it was a four - Just Tuesday? Okay. It was a$4 billion guide in the quarter that launched a half a trillion dollar market cap gain across seven or eight stocks. And that's just feels a little unnatural to me. Victoria, quickly on Broadcom.