Are Bulls Likely to Enter the China Shop?
Wednesday, March 27th, 2024
In something of a mirror-image final hour of trading from yesterday, steady levels through the day ramped higher late to close at session highs across the board. We were led today by the small-cap Russell 2000, which would stand to reason: once a bull market goes on for a certain length of time, it begins to broaden out among segments. As small-caps have been the laggard during this two-quarter rally, the Russell is starting to catch up: +1.98% on the day, followed by the Dow +477 points, +1.22%, the S&P 500 +0.86% — to a fresh all-time closing high once again — and the high-flying Nasdaq +0.51%.
Current market vibes don’t seem to be at all concerned about Friday morning’s Personal Consumption Expenditures (PCE) report, similar to how market participants charged into the green ahead of last week’s Federal Open Market Committee (FOMC) meeting, which kept interest rates steady but also kept its dot-plot for three rate cuts by the end of the year. The PCE numbers, which pull from durable and non-durable goods sales, as well as personal income and outlays from prior monthly reports, reached +2.5% year over year (+2.8% core) — among the best-performing metrics for bringing down inflation.
As we mentioned in this space ahead of today’s opening bell, should these numbers tick down further we’ll be even closer to the optimum +2% inflation the Fed seeks; Fed Chair Powell also name-drops the PCE often in his public addresses about FOMC decision-making. However, this run-up does carry some risk: should these figures ratchet back up somewhat —toward +3%, instead of +2% — this may trigger some negative sentiment, that which correlates economic strength with delays to the first interest rate cut, currently penciled-in for the June FOMC meeting.
Take, for instance, the most recent Durable Goods Orders report, which posted positive growth for only the third month in the past eight, but second of the last four. PCE reports are complex conglomerates of economic data, so it’s hard to know ahead of time, but there is a possibility that the print will be inconveniently healthy. That said, wage growth in other metrics seems to have slowed a bit, with consumer appetite for higher-priced items finally showing signs of abating. This would help keep Friday’s numbers subdued.
Speaking of higher-priced items, RH RH — the luxury furnishings company formerly known as Restoration Hardware — posted big misses on both top and bottom lines after today’s closing bell. Earnings of 72 cents per share were well below the $1.72 in the Zacks consensus (and the $2.88 per share reported a year ago), on $738 million in quarterly sales — down year over year and below the $777 million anticipated. Gross margins reached +8.7%, down from the estimated +12%, and this marks the fourth earnings miss for the high-end retailer in the past five quarters.
Yet shares are up almost +8% in late trading at this hour, swinging back into the green year to date and +23% from a year ago. Part of this might be attributed to the almost poetic message in the company’s press release, where the company remarked it has “spent the last 18 months destroying the former version of ourself,” with obvious hopes to rise phoenix-like from its ashes. So far, late-session traders believe them; it’s usually a good idea to post big quarterly misses during a major bull rally.
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