Shares of Coke and Pepsi were down about 5% on Thursday and trending lower as Ozempic and other obesity drugs become popular. Unfortunately for Coke, Pepsi, Mcdonald’s, and other companies, users claim they eat less food. Walmart confirmed initial reactions, saying its customers taking Ozempic and other appetite-suppressing drugs are purchasing less food.

Drugs like Ozempic “have the potential to have a bigger impact on food consumption … than, arguably, anything that we’ve seen before,” said Bernstein analyst Alexia Howard. Change won’t happen overnight, she noted, but it could be long lasting. -CNN

Morgan Stanley forecasts that up to 7% of the U.S. population may take obesity medications in ten years. It is estimated that people taking the drug could cut their caloric intake by up to 30%. While Ozempic may seem like a miracle drug, there are drawbacks. Per Drugwatch.com, The most common Ozempic side effects are nausea, vomiting, diarrhea, abdominal pain, and constipation. Serious Ozempic side effects include allergic reactions, changes in vision, and pancreatitis. The graph below compares Novo Nordisk, maker of Ozempic, to Coke, Pepsi, McDonalds, and Hershey. Like AI, obesity drugs are a hot sector. As such, companies like Coke and Pepsi may remain under pressure, and Novo Nordisk may benefit.

Novo nordisk, coke pepsi hershey and McDonalds.

What To Watch Today

Economy

No notable economic reports today

Earnings

No notable earnings releases today

Market Trading Update

The market failed to support at the 150-DMA level and quickly tested the 200-DMA as expected. The good news is the market bounced sharply off support levels on Friday, reducing the MACD “sell signal.” If the market can follow through on this rally early next week, we could see a “buy signal” triggered.

As discussed in February, our year-end target remains 4500 on the S&P, given a “no recession” scenario between now and then. To wit:

“Adding the bullish scenario to our projection chart gives us a full range of options for 2023, which run the gamut from 4500 to 2700, depending on the various outcomes.”

Of course, since then, the markets have rallied sharply, and earnings estimates have improved. Therefore, if I reapply the valuation model, we can update the price estimates for both recession and non-recession scenarios. Our target of 4500 by year-end remains, but our bottom target has risen to 3000 due to increased estimates. Such is still a 1500-point range with downside risk dwarfing upside potential.

Chart of "Price Estimates Recession For Both Recession And Non-Recession Scenario"

The decline since June was as expected. However, the selling at the beginning of the week seemed like a liquidation event. Given the reduction in asset prices, a drop in bullish sentiment, and technically oversold conditions, the potential year-end rally remains.

The Week Ahead

Earnings season starts later this week, with the airlines on Thursday and large banks on Friday. The regional banks will report early the following week. Also of significant interest will be the FOMC minutes from their prior meeting and the BLS CPI and PPI reports. Analysts expect Core CPI to be in line with last month’s reading at +0.3%, thus reducing the year-over-year rate to 4.1%. Year over year, core PPI is expected to come in at about half the CPI rate.

Regarding the FOMC minutes, we will stay alert for any changes in how they characterize inflation and economic strength. We highly suspect they will make it clear that “higher for longer” is the policy going forward.

Navigating The Staples Sector With SimpleVisor

As we note above, Coke, Pepsi, Mcdonald’s, Hershey, and other junk and fast food purveyors are falling victim to the new line of obesity drugs. Accordingly, the consumer staples sector (XLP) is under pressure. While selling all consumer staples stocks may be tempting, not all staples companies are negatively affected. Many investors who want a share of staples in their portfolios may likely sell the food and beverage underperformers and favor other staples.

SimpleViso r has a relative analysis tool to help suss out which companies are outperforming and underperforming within the sector. For more detail on how we calculate the data in the graphics below, please read SimpleVisor Makes Relative Rotation Simpler, Part 2. The two graphics below show that of the top ten holdings of XLP, Coke and Pepsi are among the most oversold.

BLS Labor Market Update

The BLS reported the economy added 336k jobs in September. Such is unexpectedly strong, especially when compared to the weak ADP report. The lesser followed data within the BLS report should be less concerning from the Fed’s inflationary point of view. Hourly Wages grew +0.2%, which is lower than the +0.3% expected and the same as in August. On a year-over-year basis (+4.2%), that is the lowest rate since June 2021. The average workweek stayed flat at 34.4 hours. Such indicates wage pressures have cooled despite the strong labor market. The labor force participation was unchanged at 62.8%. Typically, this number should increase in a strong labor market. However, it is now at pre-pandemic levels. Lastly, full-time jobs have decreased for three months in a row, whereas part-time jobs have increased for three months in a row.

The following thoughts are from Mish Shedlock:

A gain of 336,000 is surprisingly strong, given economists’ expectations of 160,000 and an ADP report of 89,000.
However, employment only rose by 86,000, and the participation rate (those looking for work or working) did not increase at all.
For August, employment rose by 222,000, but unemployment rose by 514,000. Over half a million people wanted jobs but couldn’t find them last month.
The civilian noninstitutional population is 267,428,000. Employment is 161,570,000. That means there are nearly 106 million people aged 16 and older who are not working at all.
Because of annual benchmark revisions, the way the BLS reports revisions, and the relatively small sample sizes of monthly jobs reports, we cannot, with strong confidence, suggest these reports portray an accurate picture of either jobs or employment.