Wall Street closed out the year on Friday with its worst yearly performance since the financial crisis in 2008. The benchmark S&P 500 fell nearly 20% in 2022, while the tech-heavy Nasdaq Composite lost a third of its value with a 33% drop for the year. The blue-chip Dow ended about 9% lower. After three years of relentless gains – including through a pandemic – markets came back to earth in 2022. The rollercoaster year saw a war between Russia and Ukraine, surging inflation, and the Federal Reserve hiking rates for the first time since 2018. With economic data through 2022 suggesting that the rising interest rates have yet to really cool the economy, worries have risen that the Fed will tighten policy too far which could tip the economy into a recession. Heading into 2023, these concerns are expected to continue to weigh on sentiment.
Travel was upended from coast to coast over the Christmas holiday weekend, as snow, wind and subfreezing temperatures enveloped much of the country. That derailed the plans for many a flyer, as well as the operations of airlines that saw planes freeze overnight and airports run out of space for de-icing. No one appeared to be hit as hard as Southwest Airlines (NYSE:LUV), whose stock initially slipped as complaints piled up. Travelers were stuck in long lines to rebook flights and retrieve baggage, and experienced unanswered calls when dialing customer service.
What happened? Southwest embarked on a major expansion to new cities during the pandemic, but that left it vulnerable to disruptions when things went wrong. As opposed to flying around central hubs, Southwest planes zig-zag across the country, making it tougher to reserve pilots and flight crews when its platforms can’t keep up with scheduling changes. The airline has even ramped up staffing above 2019 levels, and said it would restore its quarterly dividend early next year, but it has more work to do to settle the skies and technologically update its scheduling systems.
Calling it the “largest scale event that I’ve ever seen,” Southwest CEO Bob Jordan extended his “heartfelt apologies” following the extreme winter weather. However, the airline still canceled over 50% of its daily flights over the past week despite improving conditions and warming temperatures (it hoped to “return to normalcy” on Friday).
Under investigation: “We are past the point where they could say that this is a weather-driven issue,” U.S. Transportation Secretary Pete Buttigieg said in an interview with CNN. “Their system really has completely melted down. I made clear that our department will be holding them accountable for their responsibilities to customers, both to get them through this situation and to make sure that this can’t happen again.” (49 comments)
China dropped its quarantine requirements for inbound visitors this week, further easing its strict COVID controls three years after the onset of the pandemic. China’s central health authority also stopped publishing daily data on infections and deaths, as it downgraded the seriousness of COVID-19 to a “Class B” infectious disease, which requires more basic treatment and prevention. To minimize the impacts on the world’s second-largest economy, some Chinese regions even said people could return to work if they had mild symptoms.
More upbeat? “Most Chinese cities could recover from the first wave of the latest COVID-19 outbreak by January,” noted Chaoping Zhu, global market strategist at J.P. Morgan Asset Management. “This would be faster than people have expected.”
In the meantime, the initial shockwave of infections is leading to overrun emergency rooms and hospitals, while crematoriums are filling up as the zero-COVID stance is completely abandoned. Shares of Fu Shou Yuan International Group (OTC:FSHUF), China’s biggest cemetery and funeral service operator, even had a session gain of 22% in Hong Kong, taking its advance over the last two months to nearly 80%.
World is worried: Countries are now concerned that the virus’ untracked spread, and lack of viral genomic sequence data, could trigger a dangerous or super-contagious new variant. Without proper identification, it would be increasingly difficult to take prompt measures to reduce the spread. From the United States to Japan and Italy to India, a growing number of countries are now putting in place restrictions on inbound travelers from China. (7 comments)
Tesla (TSLA) slid out of the list of the top 10 U.S. companies by market cap after logging its seventh straight decline on Tuesday. Shares plunged over 11% to under $110, bringing the YTD losses for the company led by Elon Musk to nearly 73%. Weighing on the electric vehicle maker were reports of another production pause in Shanghai, as well as an adverse delivery outlook from rival Nio (NIO), but when looking deeper into it, a bubble may simply be deflating.
Don’t fight the Fed: All the Big Tech giants, which Tesla is often compared to, have been battered this year as the central bank implemented a series of severe interest rate hikes to counter inflationary pressures. Meta Platforms (META) is down 65% YTD, while Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL) and Microsoft (MSFT) are off between 30-50% in 2022. Many have warned that these players traded at higher than normal multiples even in during the cheap money era, but then again, the doubters have been proven wrong time and time again. Will the next stretch be different?
Not helping the Tesla situation is Elon Musk’s distraction at Twitter, global economic uncertainty, and rising competition from traditional ICE producers and EV makers alike. Musk has also been selling Tesla stock in big chunks despite pledges to the contrary, while promises of Full Self-Driving mode have failed to materialize. Tesla has also been expanding its discounts, raising questions about demand, especially as prices of used Teslas fall faster than those of other carmakers.
Time for another split? Tesla has seen around $720B of shareholder value vaporize this year, becoming the largest contributor to the S&P 500’s decline in 2022. Shares are down 44% in December alone, and have plunged over 70% YTD, which is more than double the decline of the Nasdaq Composite (some analyst commentary and institutional buying did help the stock later in the week). Tesla has traded under $30 for most of its 12 years on public markets (on a split-adjusted basis), and only soared to $100, $200, $300 and then $400 in the last few years of pandemic stimulus trading euphoria. (388 comments)
It ain’t a sleigh and reindeer, but Amazon (NASDAQ:AMZN) began deliveries using Prime Air drones in Lockeford, California, and College Station, Texas. Amazon hopes to use feedback from the service to improve its operations, and eventually scale the program nationwide. To fly delivery drones in the U.S., companies have to be approved by the FAA, and the retail behemoth is one of only several firms that has received Part 135 certification.
How it works? Once onboarded, customers can see Prime Air-eligible items on Amazon. They place their order as they normally would and receive an estimated arrival time with a status tracker. For these deliveries, the drone will fly to the designated delivery location, descend to the customer’s backyard, and hover at a safe height. It will then release the package and rise back up to altitude.
“Our aim is to safely introduce our drones to the skies,” commented Natalie Banke, spokesperson at Prime Air. “We are starting in these communities and will gradually expand deliveries to more customers over time.”
The competition: Alphabet’s (GOOG, GOOGL) Wing launched commercial service just north of Dallas in April, and hopes to soon press the button on wide-scale deployment. Walmart’s (NYSE:WMT) drone delivery program is also available to households in Dallas, Orlando, Phoenix and Tampa, making it possible for customers to get diapers or dinner ingredients delivered in 30 minutes or less. Meanwhile, Uber Eats (NYSE:UBER) has promised to ratchet up drone delivery operations in the near future, but until now, the technology has been mainly focused on small-scale trials. (40 comments)
Russia responded to the G7’s attempt to cap gains from its oil revenues, with a new decree signed by Russian President Vladimir Putin. The motion, which takes effect between Feb. 1 and July 1, will ban contracts that “directly or indirectly” comply with the $60 price ceiling levied by Ukraine’s Western allies.
Fine print: Putin is allowed to carve out exemptions by “granting special permission” in certain circumstances. The decree also falls short of heavier potential countermeasures, like setting a minimum price differential or barring certain countries from purchases.
Meanwhile, Russia’s flagship crude, known as the Urals blend, is trading below the $60-a-barrel threshold set by the EU and G7, meaning the cap has yet to apply and most business can proceed without restrictions. Moscow has separately offered large discounts for the main importers of its oil, India and China, which haven’t signed up to the sanctions. Many analysts also note that Russia has enough of a shadow fleet to skirt the sanctions, meaning more shipments will be rerouted, which is already happening across the global crude industry.
Market reaction: While headlines were quick to flag a potential disruption, investors are not banking on one – yet. WTI crude futures (CL1:COM) traded largely unchanged around $79 per barrel, while Brent crude (CO1:COM) continued to hover around $84. The bigger story appears to be the full reopening of China and how that oil demand will impact the global economy. (74 comments)
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