Stocks Shrug Off Brexit Worries

Stocks Shrug Off Brexit Worries

by John Natale, Wells Fargo Asset Management

Stocks staged a comeback from morning losses as new data showing a healthy U.S. services sector helped investors shrug off Brexit concerns.

The Dow ended ahead 78 points, with 23 of its 30 components gaining; the S&P 500 Index rose 11 points; and the Nasdaq added 36. Advancers topped decliners by nine to five on the NYSE and by five to three on the Nasdaq. The prices of Treasuries weakened. Gold futures increased $8.40 to close at $1,367.10 an ounce. The price of crude oil rose 83 cents, settling at $47.43 a barrel.

In earnings news:

• Walgreens Boots Alliance Inc.’s third-quarter earnings fell to $1.01 a share from $1.18 a share a year earlier. Revenue rose 2.4% to $29.5 billion on a 3.7% increase in U.S. retail pharmacy sales. The drugstore chain raised its 2016 earnings outlook and expects its acquisition of rival Rite Aid to close in the second half of 2016. Walgreen’s shares (WBA) fell 2.36%.

In other business news:

• The U.S. services sector grew in June at its fastest rate in seven months. The Institute for Supply Management’s nonmanufacturing index rose to 56.5 from May’s 52.9 reading. Any reading above 50 indicates expansion. Business activity rose to 59.5 from 55.1. New orders rose to 59.9 from 54.2. Employment increased to 52.7 from 49.7, which signals a rebound from contraction territory. Prices paid edged down to 55.5 from 55.6.
• Minutes from the Federal Reserve’s June policy meeting revealed the central bank’s policymakers held mixed views on everything from the labor market’s health to whether inflation would return to the Fed’s 2% target rate in the medium term. Absent from the central bank’s June minutes was any mention of firm timing for future rate hikes. What the Fed did discuss about rates pointed to a mixed view of whether economic conditions would soon merit a potential hike.
• The U.S. trade deficit expanded a seasonally adjusted 10.1% to $41.1 billion in May, according to the Commerce Department. Exports fell 0.2% as U.S. trading partners ordered fewer capital goods, automobiles, and consumer products. Imports for those same three categories—combined with higher oil prices—helped boost overall imports by 1.9%.
• As Brexit development pushed down interest rates, U.S. mortgage refinancings jumped 21% last week, the highest level since January 2015, according to the Mortgage Bankers Association. The MBA’s seasonally adjusted purchase index rose 4% from the prior week and was up 23% from a year earlier. The average 30-year mortgage interest rate fell to 3.48% from the prior week’s 3.56%.
• Brexit’s fallout continued to weigh on non-U.S. markets today as investors monitored developments in Britain and beyond. The British pound declined to a fresh 31-year low against the dollar. The Stoxx Europe 600 Index fell 1.7%. London’s FTSE 100 Index slipped 1.3%, mainly due to real estate shares. The U.K. property sector is under pressure as foreign investors have begun cashing out, and several financial firms have temporarily halted trading in their U.K. real estate funds, with an aim to maintain stability.
• As investors overseas sought safe haven investments, government bond yields declined, in some cases to new records. The yield on Japan’s 20-year government bond dropped below zero for the first time in history. The yield on 10-year U.K. government bonds fell to a record 0.732%. As a reminder, yields move inversely to prices.

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If you’ve ever hailed an Uber car, you may be familiar with the ride-sharing app business’ surge pricing model. When demand for rides is high and the number of riders surpasses that of drivers, Uber jacks up its prices to encourage drivers to log on and flood the area. Because the company’s customers tend to despise this model, Uber is piloting a new iteration of its app that some say conceals surge pricing from customers.

According to The Verge, Uber’s app users will no longer see a lightning bolt–shaped icon on their screen, coupled with a pop-up notification that fares will be multiplied by two, three, four, or whatever multiple seems right to the X-billion company when most people are eager to go places. Instead, customers will see a simple up-front fare amount, under which lies a small, faint line of text saying that demand has increased.

Uber justifies the move as a humanitarian service for their customers, who’ll no longer have to look at that awful notification that prices have multiplied and thereby suffer through the inconvenience of having to do math in their heads to gauge their rate.

None of this poses a problem for me. As the father of a toddler, I rarely see the Uber app’s lightning bolt icon on my phone’s screen because I seldom venture out during peak Uber times. I’d be more likely to see a pop-up window in my Uber app asking me why I only go out to dinner before 5:30 p.m. and if I’ve ever considered how cool it would be to join the masses in traveling during peak periods.

On the flip side, other on-demand businesses are considering adopting Uber’s original surge pricing model. VentureBeat projects that app-based food delivery services will need to adopt surge pricing to compensate for increasing delivery driver costs, such as higher wages and demand for more benefits. If those expenses rise, the CEO of food delivery search engine Bootler believes consumers will be required to make up the difference. The reason: On-demand companies that deliver the food take 10% to 30% of each order, and the restaurants that make the food already operate on tight margins.

Foodie website Eater estimates that customers could end up paying $30 for a $7 sandwich if on-demand food deliverers adopt surge pricing, when you factor in the increased delivery fee, an existing service fee, and the tip for your driver.

This poses a challenge for consumers who use both ride-sharing and on-demand food delivery apps. If you want a $7 sandwich during the peak dinnertime period, what makes more sense economically? Should you pay an inflated price to a food delivery company for the convenience of not having to get up from the couch, or should you pay an inflated price to Uber for the experience of eating food at a restaurant?

I have an idea that allows consumers to circumvent the whole issue: Delete both apps from your phone, which will save you precious data space, and then make a sandwich in your kitchen, which will save you money. I know … this isn’t as much fun, but at least you’ll get your sandwich quicker. Plus, if you have a jar of pickles in your fridge, you can take as many as you want—not just the typical single pickle that take-out shops give you—and you won’t incur any kind of “pickle fee.”

Granted, I haven’t found any news articles revealing that on-demand pickle apps are going to introduce surge pricing, but you never know! It seems like every day, a new app startup pronounces itself the Uber of something. Should the Uber of Pickles emerge from Silicon Valley’s incubator of questionable billion-dollar businesses, don’t get too comfortable with their pricing model.