A Warming Market and Planet
Q3 could be a rally point; but a heatwave scorches the US and Europe
July 20th, 2022
The Market advanced today as companies, such as Netflix, start to report second-quarter earnings that may not be as bad as feared. All Major Market indexes advanced.
The S&P 500 gained by 0.59
The Dow Jones edged up by 0.15%
The NASDAQ climbed by 1.58%
The Russell 2000 ended up by 1.59%
The Market has found itself in a little bit of a rally since last week's inflation report, which is surprising given the alarming state of inflation across the US economy. Wall Street pundits credit both substantial consumption numbers and the Federal Reserve's restraint on signaling a 1% interest rate hike at the end of July.
In truth, Wall Street institutional investors constantly weigh new factors into its market models. And this week, they may have over-toggled what the Federal Reserve could do in the face of 9.1% inflation and its overall impact on the US economy.
Some parties are optimistic about a third-quarter turnaround, and big bank CEOs heralded upbeat forecasts for the third quarter following a down second quarter. As earnings reports start trickling in, many analysts hope that the worst came to pass in the second quarter and that the third could be when the US gains footing to finish the year strong despite higher interest rates.
The Market has a sunnier disposition this week, but in weather news, it may be a little bit too bright.
Hot Hot Summer
A record-breaking heatwave is tearing throughout the world, with everywhere from Greece to the Midwest feeling summer temperatures surpassing 100° Fahrenheit. The heatwave is likely a product of fossil fuel-induced climate change, where the globe has seen its average temperature rise by 2° Fahrenheit since 1880, with the poles seeing increases of more than 6° Fahrenheit.
Europe has become especially prone to deadly heatwaves due to a lack of air conditioning infrastructure (they didn't need them before). Heat advisories in the US affect 100 million Americans across 28 states, causing disruptions and wildfires. Unfortunately, highly volatile weather has become the new normal as the world struggles to reduce carbon emissions.
Why this matters
The global temperature increases come in the backdrop of Russia's invasion of Ukraine, which has disrupted global energy markets, scuttering many countries' climate pledges. In the US, Democratic Senator Joe Manchin announced he would not support the Biden Administration's energy policies.
Germany is facing an energy crisis in Europe, which has pledged to heavily reduce its import of Russian oil. The Nord Stream 1 gas pipeline has been shut down for ten days for maintenance, but there are fears that Moscow will opt not to turn it back on, causing Germany to scramble to secure additional natural gas suppliers and pushing prices higher.
As Europe works to install air conditioning units rapidly, its fossil fuel demand and prices will continue to climb, creating a carbon-inflation feedback loop. The silver lining is that high energy prices and immediate urgency make other technologies, such as wind and solar, more cost viable and palpable. Still, increased capacity takes a long time to install--precious time that humans don't have to spare.
Netflix's Franchise Reboot
Following a dismal first quarter in which it lost subscribers for the first time in many years, Netflix reported second-quarter earnings on Tuesday in which it saw its revenue grow by 8%. While the company reported losing nearly 1 million subscribers in the second quarter, this churn was half what it had previously warned.
Netflix attributed its outperformance to the vast popularity of a new season of its "Stranger Things" series, which helped grow its subscriber base outside the US. Still, most of the subscriber loss occurred in the US and Canada, which is troubling for the company.
Why this matters
Wall Street rewarded Netflix for its surprise performance, with its shares gaining more than 13% since last week. However, most of Netflix's revenue growth is due to increasing monthly subscription prices, which rose from $7.99 to $9.99 for the base tier subscriber.
This new price point comes during a period of high inflation, in which Americans are starting to substitute their purchases. Additionally, Netflix has seen increased competition from other streaming providers such as Disney (Disney+ and Hulu) and an overall glut of content for viewers to consume.
However, Netflix realizes that its subscription prices may be price inelastic (it loses viewers when it raises prices). The company plans to add a lower-cost subscription package supported by ads, which is a significant departure for the company that has advocated for a high-quality user experience throughout its rise.