HOT AIR BALLOON FLIGHT

By Julia Horowitz • Friday, January 7

Good morning. In today's newsletter: It was a bad week for tech stocks, but one strategist still wouldn't bet against Apple. Plus, the US jobs report for December is coming, and investors go wild over GameStop's reported move into crypto.

 

US stock futures are up as investors wait for the latest jobs numbers. Markets in Europe were mixed in early trading, following stocks in Asia. Unrest in Kazakhstan is pushing up oil prices.

 

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MARKET FLASH

Big Tech could brush off rate hikes. Startups may struggle

Apple, Microsoft, SoFi and Coinbase all sold off sharply this week, as investors, anticipating higher interest rates, dumped tech stocks and bought shares of companies they believed were undervalued.

 

Given some time, however, Randy Frederick, Schwab managing director of trading and derivatives, thinks certain tech companies will fare better than others.

 

"The smaller, more leveraged ones are going to struggle," Frederick told me.

None of these stocks had a good start to the year. Apple, which became the first public company to be valued at more than $3 trillion on Monday, has shed 5.5% since Tuesday. Over the same period, Microsoft has dropped more than 6%, while fintech startup SoFi and crypto firm Coinbase have fallen 12% and nearly 7%, respectively.

 

Breaking it down: Concerns that the Federal Reserve could hike interest rates more aggressively than investors had anticipated were amplified this week when minutes from the central bank's most recent meeting were released. 

 

That encouraged Wall Street to ditch tech firms with lofty valuations, since higher rates could hit future earnings. It could also lead to higher borrowing costs for companies that need to take on a lot of debt to keep growing quickly. Meanwhile, investors snapped up stocks in sectors like banking that perform well when interest rates are rising.

 

The entire tech industry was swept up in this rotation. But Frederick believes that once the fervor subsides, the Apples and Microsofts of the world will quickly recover, as Wall Street moves to buy its favorite stocks at a discount.

 

"When the bounce back starts to come, you'll see it will probably be in the mega-caps first," Frederick said, referring to firms with the biggest market values.

 

These companies have plenty of money on hand — Apple ended its September quarter with an eye-popping $191 billion in cash and marketable securities — and can roll-over their debt at prime rates. 

 

That's not necessarily the case for companies like SoFi and Coinbase, which both went public last year and need their businesses to keep expanding at a rapid clip to justify their valuations.

 

SoFi's stock finished Thursday near its lowest level since the digital lender started trading on the Nasdaq in June 2021.

 

Big picture: Expect to hear the phrase "selectivity" a lot over the coming months. Once interest rates begin going up, analysts think the "buy everything" rally that took hold last year will likely give way to a period in which investors need to be more discerning about which stocks and assets they own.

 

That could continue to hurt the shares of riskier companies that looked a lot shinier six months ago.

VOICES

Americans are tired of Covid and ready to spend

"The Covid fatigue is real. And especially given the less deadly nature of this particular variant, I don't see it causing this watershed change in consumer behavior."

 

TIM QUINLAN, WELLS FARGO ECONOMIST

 

Read more from CNN Business.

ECONOMY MONITOR

Get ready for the US jobs report

Economists predict that America closed out 2021 with strong job gains, even though the effects of the Omicron variant may not yet be fully apparent.

 

Coming up: The jobs report for December is expected to show that the US economy added 400,000 positions, nearly double the previous month's count, according to a survey from Refinitiv.

 

That would push the unemployment rate down to 4.1%, a pandemic-era low.

 

If the forecast for Friday's report holds true, the country would have added roughly 6.5 million jobs in 2021 — an impressive feat, though it still leaves the United States 3.5 million jobs short of where it stood in February 2020.

 

A caveat: The report likely won't show the impact of the new variant just yet, my CNN Business colleague Anneken Tappe notes. That's because it relies on surveys conducted in the middle of the month.

 

Omicron was already spreading in mid-December, but rising infections made staff shortages significantly worse by the end of the year.

 

On the radar: Investors and policymakers put a lot of stock in the jobs report, an important barometer of the health of the economy. A strong reading would bolster expectations that the Federal Reserve could hike interest rates soon, while a weak reading could surface some doubt. The market is increasingly betting on a March increase.

 

But during the pandemic, initial jobs data has been murky due to difficulties collecting it. Last month, the US Bureau of Labor Statistics revised up data for September and October by 82,000 positions. 

UP NEXT

The US jobs report for December arrives at 8:30 a.m. ET.

 

Coming next week: Corporate earnings season kicks off with results from Delta Air Lines, JPMorgan Chase and Wells Fargo.

WHAT WE'RE READING AND WATCHING

▸ Political upheaval hits crypto mining in Kazakhstan (CNN Business)
▸ Mortgage rates just climbed past 2021 levels (CNN Business)
▸ Why uranium prices have jumped this week (FT)
▸ Wall Street is using Zillow to eat up starter homes (Bloomberg)
▸ Companies are turning to long-haul trains (CNN Business)
▸ US trade deficit hits near-record high as imports surge (AP)

FINAL WORD

A meme stock gets into crypto, and investors go wild

What do you call a report that the most famous meme stock is taking steps to make crypto a part of its business?

 

I'll go with "investor catnip." 

 

The latest: The Wall Street Journal reported Thursday that GameStop is launching a division to develop a marketplace for NFTs, or non-fungible tokens, and set up cryptocurrency partnerships as it tries to diversify its video game business.

 

The news outlet said the company has hired more than 20 people to build an online marketplace for trading NFTs of avatar outfits and weapons, and that the company will ask game developers to list NFTs on its hub when it goes live later this year. It's also reportedly close to signing partnerships with two crypto companies to co-invest in new games that use blockchain technology.

 

Shares of the Texas-based company are up 14% in premarket trading.

 

The takeaway: Companies like GameStop that are at the center of the recent buying craze among amateur investors want to parlay the hype into a more meaningful business turnaround. The company's losses widened in its most recent earnings report. And this strategy isn't a total curveball given how popular NFTs have become — especially among younger people, a demographic important to GameStop.

 

The company also wants to hold on to recent devotees to its stock. A pivot to crypto excites the investors on Reddit and Discord that made GameStop a household name in 2021, which then gives bigger players confidence to maintain their stakes.