Stock Market Comment: Equities and US social unrest

• Stock markets largely ignored US protests

• Social unrest triggered by killing of George Floyd in police custody

• Violent riots mostly confined to major cities

• Capri Holdings, Apple, Nike and many others had their stores looted

• Riots eased but looting remains a problem

Stock markets are incredibly resilient this year. Avalanche of fiscal and monetary stimulus helped equities recover a big chunk of the February-March sell-off. However, another threat to the US economy looms on the horizon - massive protests. In this commentary we will take a quick look at the background for ongoing protests as well as try to determine what groups of stocks are the most endangered.

Background for protests

Massive protests in the United States were triggered by the killing of George Floyd in police custody on May 25. Floyd was an Afro-American therefore the issue was immediately linked to racism. However, one should keep in mind that it was not this case alone that triggered social unrest. Years of dissatisfaction over US police crossing the line (often in racial context) as well as massive unemployment triggered by coronavirus lockdowns made US society a ticking bomb. Last but not least, its election year in the United States and in those years politicians and citizens are more dividend than usual. This division is apparent during ongoing US protests with Democrats failing to condemn aggression and Trump threatening to use the military to disperse protesters.

In spite of riots wreaking havoc on major US cities, Wall Street completely ignored the issue. Vertical line on the chart above marks the day George Floyd was killed. Protests began the next day and S&P 500 index (US500) has booked a 4% gain since. Source: xStation5

How stock markets reacted to US protests?

To tell the truth… stock markets completely ignored the issue so far. We saw no reaction on major indices to the unrest that is ravaging major cities in the World's biggest economy. On one hand, markets also ignored issues like continuously poor economic data and threat of renewed stand-off between the United States and China. On the other hand, the situation is a bit different when it comes to US riots. Big and disruptive protests are taking part in major US cities and economic damage is likely to be limited to these areas. On the contrary, Covid lockdowns were nationwide and economic damage was widespread as well. Summing up, the stock market may be ignoring US riots because at the current stage they are not as big of a risk to the overall US economy. However, it can be a different story for individual companies and sectors.

Taking a look at a daily chart of Capri Holdings (CPRI.US), owner of Versace or Michael Kors brands, one may rule that the company has barely recovered from the coronavirus sell-off. In fact, Capri rallied over 200% since March low! This only shows how steep the February-March sell-off was for luxury goods companies. The company is currently moving within an upward channel. Capri Holdings took a noticeable hit from disruptions caused by Hong Kong protests in Q2 2019 and it should serve as a warning note for incoming earnings releases from the company. Source: xStation5

What sectors are at risk?

Looting is a key word here. Sectors that are at the biggest risk from ongoing protests are those that can be easily looted… read retailers. Retailers are also at risk due to long-term industry practices. Namely, it is widely believed that the more prestigious location of a shop, the better for the business. In turn, many brands have their flag shops located in major cities, near the busiest avenues and that's where many violent protests are marching through. However, busiest avenues are rarely flooded with food/consumer staple retailers. Instead, a lot of luxury goods and fashion retailers decide to set up stores there.

Luxury goods companies often have widespread global presence but it is hard to find their shops outside of major cities. US wealth makes it one of the most important markets for those companies and social unrest in major cities can have a meaningful impact on Q2 earnings. Note that even if stores of the company were not looted, revenue is likely to suffer from closures and curfews.

Tiffany (TIF.US) almost fully recovered from the February-March sell-off but got locked in a sideways move later on. The stock nosedived when rumours of LVMH rethinking Tiffany acquisition hit the market. Share price plunged towards recent lows and remained under pressure since. Source: xStation5

Damage done already

Among companies that confirmed looting of their stores one can find Capri Holdings Limited (CPRI.US), Nike (NKE.US), Hennes & Mauritz (HMB.SE), Best Buy (BBY.US) or Apple (AAPL.US). Moreover, LVMH (MC.FR) is reviewing the $16 billion acquisition of Tiffany (TIF.US) - drop in demand caused by Covid-19 pandemic is said to be the main reason but ongoing social unrest will also play a role in the decision. Decision to walk away from the acquisition would send a clear signal to the luxury goods sector that things are far from perfect and it could weigh on similar companies.

Overall damage to the US economy will depend on how long the protests/riots last and while they have eased in the past two days, looting remains a problem. To make things worse, US police notes that looting is more and more often carried out by organized groups rather than spontaneous protestors. This is a problem as such a situation is likely to dig deeper into divisions between those who say protests are a way of demanding justice and the ones claiming they are just a reason to spur chaos.