Why the Stock Market Doesn’t Care About Rate-Cut Timeline and 5 Other Things to Know Before Markets Open

In the space of a month, expectations for the date of the first rate cut have slid from March to June. Yet over the same period the S&P 500 has climbed 5.5%, topping the 5,000 milestone for the first time and marching higher still. The closing bell Thursday marked a record high for the index, as falling retail sales provided a rare data point in favor of an earlier start to cuts.

There have been two notable bumps in the road recently. The Federal Reserve’s January meeting, after which Jerome Powell dashed hopes for a March cut, and Tuesday’s hotter-than-expected inflation data.

The S&P 500 fell more than 1% on both days—the only times that has happened in 2024. On both occasions those losses were recouped within two days.

The stock market is digesting more evidence of a delayed rate-cut timeline Friday. Atlanta Fed President Raphael Bostic made a pretty convincing case for the central bank taking its time, in a speech Thursday.

The strong U.S. labor market and “muscular economic growth,” along with resurgent business optimism, makes the argument for continued patience, he said. He’s also “not yet comfortable” that inflation is definitely heading toward the central bank’s 2% goal.

As a Fed voting member, his view is important. But the stock market will probably get over it fairly swiftly. As long as the next move in rates is lower, and the economy and earnings remain resilient, the market will be happy.

—Callum Keown

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Consumers Still Spend in Restaurants as Burger War Sizzles

Restaurants and bars were among the few places where consumers spent more in January, according to the latest retail sales report. While eateries, department stores, grocery stores, and home furnishing retailers saw higher spending, overall retail sales dropped by a more-than-expected 0.8% from December.

• Restaurant earnings have shown some stark contrasts. Burger-and-milkshake chain
  Shake Shack
  posted a stronger-than-expected 20% surge in fourth-quarter revenue and expects profit margin improvement this year. Fellow burger chain
  Wendy’s
  missed fourth-quarter earnings estimates and issued disappointing guidance.

• Chains are engaged in a burger war of words. Wendy’s plans to pitch its fresh beef burgers as higher quality, and Burger King’s parent
  Restaurant Brands
  touted blind taste tests picking its Whoppers over rival burgers.
  McDonald’s
  has a nationwide “best burger” initiative.

• At casual steak chain
  Texas Roadhouse,
  December-quarter revenue rose 15% to $1.16 billion, and profit rose 21%. Same-store sales rose 9.9% at company restaurants and 8.9% at franchise restaurants. Brew house pizza chain
  BJ Restaurants
  said revenue dropped 6%.

• Retail sales fell in January after a robust holiday shopping season. Discretionary spending declined month over month at car dealerships, home improvement retailers, sporting goods and hobby stores, clothing retailers, and electronics and appliances stores.

What’s Next: Wendy’s new CEO Kirk Tanner, formerly at
PepsiCo,
said the chain plans to invest in Wendy’s breakfast offerings, including $55 million for advertising over the next two years, and expects to drive global same-restaurant sales growth of 3% to 4% in 2024.

—Janet H. Cho, Angela Palumbo, and Sabrina Escobar

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Nike Trims Jobs in Cost-Cutting Drive

Nike, the maker of Air Jordan basketball shoes, is eliminating more than 1,600 jobs, or some 2% of its workforce, The Wall Street Journal reported, citing a company memo.

• Nike plans to use the savings to invest more in areas such as products for running, women’s apparel and the Air Jordan brand. The cuts won’t affect workers in stores, distribution centers, or on the innovation team, according to the report.

• The cuts were partially flagged in December, when the company lowered its revenue outlook and said it would look to reduce expenses by $2 billion over the coming three years. Nike didn’t immediately respond to a request for comment from Barron’s early Friday.

• Other sporting goods retailers are largely in the same boat. Adidas, Lululemon, Under Armour and Puma have all seen their share prices fall this year.

What’s Next: Nike Chief Executive John Donahoe is navigating a tough landscape as consumers grow more cautious, particularly in Europe and China. The U.S. retail sales report released Thursday underscored the challenge ahead, showing a bigger-than-expected drop in January.

—Brian Swint

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Trump-Related Blank Check Company Moves Closer to Merger

The blank check company aiming to merge with former President Donald Trump’s media ventures moved closer to the last step in that process after the Securities and Exchange Commission declared its registration statement for the deal effective. Miami-based
Digital World Acquisition Corp.
will set a date for a shareholder vote.

• DWAC shares closed up 16% on Thursday. Trump Media & Technology Group owns the Truth Social platform that is similar to X, formerly Twitter. The deal would take the Trump media venture public, and DWAC CEO Eric Swider called the SEC’s move a “significant milestone.”

• Digital World has been beset with regulatory issues that have delayed the merger for more than two years. It first started talking to Trump Media in 2021. Last summer three people were charged with insider trading related to the proposed merger. They pleaded not guilty.

• DWAC said in a filing that a conflict with its former CEO Patrick Orlando, who owns 5.49 million founder shares and 1.12 million placement units in the blank check company and wants more compensation, “presents a risk” to its ability to do the merger in a timely way, or at all.

• Shares of DWAC, which was founded in December 2020, are up 190% this year as Trump heads through the primary season as the front-runner for the Republican nomination. Other Trump-associated stocks, the online video platform
  Rumble
  and software company
  Phunware,
  also rose on Thursday.

What’s Next: DWAC also amended its registration filing to add nominees to the board who were designated by Trump Media, including former Trump administration U.S. Trade Representative Robert Lighthizer and former Small Business Administration chief Linda McMahon.

—Janet H. Cho

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DraftKings Raises 2024 Outlook as Customer Engagement Grows

Sports betting company
DraftKings
’ fourth-quarter revenue came in slightly below what analysts expected, but it raised its earnings and revenue outlook for the 2024 fiscal year, citing strong trends in customer acquisition and engagement that should drive a $125 million boost in revenue.

• DraftKings’ fourth-quarter loss of 10 cents a share fell short of expectations for a profit of 8 cents a share. Fourth-quarter revenue rose 44%, to $1.23 billion as monthly unique visitors rose 37% and average revenue per monthly unique visitor rose 6%.

• DraftKings also announced an agreement to acquire the U.S. lottery app Jackpocket for about $750 million, allowing it to expand into digital lottery games as it continues to build its sports and igaming businesses. The deal is expected to close in the second half of 2024.

• Mobile sports betting is a growing category, with DraftKings recently adding Vermont along with rivals FanDuel and Fanatics. Sports betting is live in 29 states and Washington, D.C., with North Carolina set to go live by the start of the NCAA’s March Madness basketball tournament.

• Gambling and esports company
  Penn Entertainment
  posted a wider-than-expected loss of $2.37 a share and lower revenue after starting its new sports betting platform. CEO Jay Snowden said ESPN BET brought new customers and higher promotional expenses, which weighed on net revenue.

What’s Next: DraftKings raised its guidance for fiscal 2024 revenue to a range of $4.65 billion to $4.9 billion, from $4.5 billion to $4.8 billion previously. It raised its outlook for adjusted earnings before interest, taxes, depreciation, and amortization to $410 million to $510 million.

—Janet H. Cho and Emily Dattilo

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Amid Natural Gas Glut, Producers Are Turning It Into Gasoline

A glut in natural gas supplies is forcing some producers to try an unusual tactic to make money from it. They are turning it into gasoline. A
Diamondback Energy
subsidiary agreed this week to work with
Verde Clean Fuels
on a natural gas-to-gasoline plant in the Permian Basin.

• Prices for natural gas futures touched a nearly four-year low this week, falling 23% over seven days. Producers have cut the number of rigs, but natural gas is also a byproduct of oil production, and the Permian Basin in West Texas and East New Mexico is a busy production region.

• Under the 2022 Inflation Reduction Act, the federal government just began taxing energy producers that release natural gas into the atmosphere. Natural gas is mostly made of methane, which is a potent greenhouse gas, so producers have to figure out another way to use it.

• Verde CEO Ernie Miller told Barron’s in an interview that methods to turn natural gas into gasoline have been around for years but only a handful use the process today. The plant will take methane, combine it with steam, convert that to methanol and then into gasoline.

• The resulting gas should be relatively cleaner because it won’t have sulfur and other chemicals, Miller said. Verde expects to produce just 3,000 barrels of gasoline a day, an imperceptible portion of the eight to nine million barrels of gasoline consumed every day in the U.S.

What’s Next: Diamondback, which just announced a deal to buy Endeavor Energy Resources, expects to be able to expand the natural gas-to-gasoline project over time. Kaes Van’t Hof, Diamondback’s president, said it could see similar projects across the company’s West Texas locations.

—Avi Salzman

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Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to [email protected].

1. Diamondback Energy and Endeavor Energy Resources are the latest producers to announce a merger. Combined, the two would be valued at more than $50 billion and a major presence in which of the following regions?

a. Thunder Horse Oil Field

b. Appalachian Basin

c. Permian Basin

d. Prudhoe Bay Oil Field

2. While
JetBlue Airways
appeals a judge’s decision to block its deal for
Spirit Airlines,
which of the following activist investors just announced a stake in the carrier and ongoing discussions about possible board representation?

a. Paul Singer

b. Carl Icahn

c. Bill Ackman

d. Nelson Peltz

3. Cryptocurrencies are coming out of a rut brought on by scandal and the failure of crypto companies. The price of Bitcoin climbed back above the $50,000 mark this week and reach the highest levels for the first time since when?

a. December 2021

b. December 2022

c. January 2017

d. January 2018

4. The consumer price index for January showed 3.1% growth from a year earlier, an unexpectedly strong report that has slammed expectations for the timing of the Federal Reserve’s first interest rate cut. Futures markets put the probability of a March rate cut at about where after the CPI data came out?

a. 5%

b. 10%

c. 15%

d. 20%

5.
Warren Buffett’s Berkshire Hathaway
trimmed its biggest holding,
Apple,
by 10 million shares. It still holds about 905 million shares of the iPhone maker. Which of the following stakes did it add to in the December quarter?

a. Sirius XM

b.
Occidental Petroleum

c.
Chevron

d. All of the above

Answers: 1(c); 2(b); 3(a); 4(b); 5(d)

—Barron’s Staff

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner