Despite the resilience of stocks in the past month, and continued buzzy headlines about big deals, two areas of the market are sending caution signals.
The first, shares of high-growth restaurant concepts, is somewhat surprising given the catalysts for all of the companies involved. Gas prices remain pretty darn cheap nationwide, and OPEC's discord this week promises to keep pump prices well controlled into 2016.
The unemployment rate is down about 80 basis points this year to 5%. Historically, more people working has meant more splurges on eating out, especially at a hot new chain. Generally speaking, that has been the case -- while slowing from earlier in the year, same-store sales for newer restaurant names not named Chipotle (CMG) have continued to be quite impressive. Moreover, same-store sales for the likes of Wingstop (WING) and Shake Shack (SHAK) have seriously outperformed the numbers being logged by most retailers. And, finally, the new restaurant names continue to promise investors very strong unit growth in 2016.
Nevertheless, the market for these names has basically crashed and talk of new IPOs (which were hot earlier in the year) is non-existent. I am not sure why the bubble has burst here, but I suspect it may be linked to the threat of higher interest rates.
With rates on the rise, the market may be concerned about companies meeting new restaurant opening targets (franchisees need funding, for example). Or, the market may be saying that the economy is unable to handle higher interest rates and as such, companies will slowdown, let people go, and force them to all eat home each evening (great for Hormel (HRL)).
Whatever the case, the crash deserves a watchful eye. And no, I wouldn't be stepping in to buy on weakness. These are stocks that have to show consistently better price action to hint the selling is through.
Shares of new restaurant concepts have plunged
Source: Yahoo Finance
The other part of the market that is crashing is relatively new to the scene, but arguably more worrying than the dismal action in once-hot restaurant IPOs. The Dow Jones Industrial Transports have severely lagged the Dow since late November. To understand the gravity of the plunge, consider the backdrop in which that has occurred:
1. The U.S. dollar has weakened a bit, which theoretically should be good for manufacturers that place orders with railroads, truckers, etc.
2. The broader market has embraced the logic the U.S. could handle higher interest rates from the Federal Reserve (see reaction to November jobs report).
3. Huge deal news continues, which should be supportive for the entire market. Action Alerts PLUS holding Dow Chemical (DD) and DuPont (DD) are reportedly in merger talks, Newell Rubbermaid (NWL) and Jarden (JAH) are possibly merging, Keurig Green Mountain (GMCR) is being sold to private equity -- these are potentially huge transactions in what has been a year of huge transactions.
Dow Transports have nosedived, despite generally improved market sentiment
Source: Yahoo Finance
Similar to the action in restaurant stocks, I am a little unsure what the market is saying here with the transports. To me, the move down signals a possible material slowdown in global growth in the U.S. in the first half of 2016. Companies presenting at bank conferences in the past two weeks haven't sounded that dire, but perhaps they will be surprised.
Nonetheless, if the transports don't start acting better, especially into next week's Fed meeting, it's a major sell signal.