Today’s early action is another reminder that tariffs reign supreme in this market. You can have great results from two of the biggest retailers, but if the headlines go south on trade that’s what seems to matter most overall.
Home Depot Inc (NYSE: HD) earnings yesterday may not have lived up to some investors’ hopes, but Lowe’s Companies Inc (NYSE: LOW) and Target Corporation (NYSE: TGT) today made up for that as both companies beat expectations. Shares jumped for both of the big-box retailers in pre-market trading, but that wasn’t enough to outweigh overall negative sentiment surrounding the trade situation.
If you’ve been paying attention to the financial headlines, you probably know pretty well what’s going on with the U.S. and China, so it’s not really worth reiterating every tweet and headline here. Things started to head lower yesterday after President Trump said he’d raise tariffs further if China didn’t agree to a trade deal. Also, Reuters reported overnight that some White House advisers would like to see China agree to large, specific agricultural purchases while the U.S. maintains existing tariffs for future leverage. Any talk of maintaining tariffs isn’t necessarily going to be welcomed by investors eager to get this trade war out of the way.
It gets more complex than that, and anyone who wants to read more can easily find out. At the heart of things, people are starting to worry that those Dec. 15 tariffs the U.S. has threatened now have a higher chance of taking effect. That might cause China to retaliate and keep the trade situation in a pickle right into the new year.
Consumers have put the economy on their shoulders lately, but if these new tariffs take effect and the trade war goes into 2020, who knows how it might affect sentiment. There might end up being a day of reckoning after—or even before—the holidays.
For now, consumers continue to help keep things positive on the earnings front. Both LOW and TGT looked impressive, especially TGT. Shares of TGT leaped more than 8% in pre-market trading while LOW wasn’t quite as giddy with a 4% gain.
TGT’s revenue and earnings easily beat third-party consensus, and same store sales growth looked explosive at 4.5%. Digital sales growth of 31% also seemed strong, though it wasn’t in the same ballpark as competitor Walmart Inc (NYSE: WMT) last week. TGT raised its outlook, too, taking the company’s 2019 earnings expectations to a range well above where analysts had been expecting. TGT now has 10 straight quarters of same-store sales growth and the stock is up more than 65% this year.
LOW missed the Street’s revenue expectations, but beat on earnings and impressed with its guidance as it raised its earnings forecast for the full year. The company’s decent results came one day after competitor HD shares took a 2x4 to the noggin following its earnings report. The HD results raised questions about housing sector health, but such concern might have been overblown (see more below).
Retail earnings roll on as the week continues, with Foot Locker, Inc. (NYSE: FL) possibly one worth watching when it reports early Friday. Lately, Nike Inc (NYSE: NKE) has had a lot of momentum, but when the company said it would no longer sell its products through Amazon.com, Inc. (NASDAQ: AMZN), it was FL that took a big stomping. FL hasn’t really been swept up in the heels of NKE’s latest run higher, so it might be interesting to watch whether some investors start to see FL as a synthetic play on NKE’s momentum, especially after we get a sense of FL’s latest earnings results.
Clock Ticking The Minutes
There’s not a huge amount of data today, but the Fed minutes this afternoon could be a diversion from this laser focus on trade negotiations. While the minutes are likely to discuss how the Fed arrived at its decision last month to lower rates another 25 basis points, they could also offer insight into the Fed’s future course of action.
The problem this time is that Fed officials have already telegraphed their intentions publicly, starting with Fed Chairman Jerome Powell at his press conference right after the meeting and continuing with other Fed speakers more recently. The Fed isn’t expected to do much going well into the new year. Odds of another rate cut don’t even reach 40% until around mid-2020, according to CME futures. Looking out a year ahead, investors in the futures complex see a 40% chance of the Fed funds rate being right where it is now.
Some of this could explain why there just isn’t much drama around the release of today’s minutes, or even going into next month’s meeting. There’s probably more drama surrounding Powell’s meeting with the president earlier this week and Powell’s statement following that about the Fed’s decisions remaining “non-political.”
Step On The Gas
It seems like a while since we touched on the weekly U.S. crude supply numbers, but the one that comes out later this morning might get a little extra attention after crude prices took a gut punch yesterday. Crude fell 3% to its lowest close this month in front-month U.S. futures as it looked like Russia might not be in the mood to cut production any further when OPEC meets next month, according to news reports. That—combined with some analysts’ expectations for growing U.S. crude stocks and pessimism about trade talks—really smacked the market, and crude fell below $56 a barrel.
If U.S. supplies rise the one million barrels or more that some market watchers expect in today’s report, more pressure could be on the way. There’s a continued belief among many analysts that demand just isn’t in the marketplace. A closely watched industry inventory report yesterday showed stockpiles rising nearly six million barrels last week.
Sometimes falling crude prices can support stocks, aside from the Energy sector. After all, when gas prices go down, it often makes life easier for consumers and transport companies like airlines and truckers. There’s another angle, too, however, that isn’t bullish. This school of thought suggests that weakening crude prices sometimes point to underlying softness in the world economy, as we saw back in the winter of 2015/2016 when crude fell to multi-year lows and stocks also took a tumble.
No one’s saying a scenario like that is necessarily on the rerun schedule, but think back a couple months ago to that bearish Institute for Supply Management (ISM) manufacturing report and remember how signs of weakness elsewhere in the economy can sometimes make it hard for stocks to rally.
Another aspect of the market that could be sending economic warning signals right now is U.S. Treasury bonds. They’ve been rallying pretty hard lately, sending the 10-year yield back well below 1.8% by early Wednesday. That’s down from a high near 1.96% earlier this month, and some analysts think the 1.8% level could be one to watch. Any descent from this point, they say, might bring more buyers into the Treasury market as caution grows. The closely-watched yield curve has been flattening again.
Gold, Dollar Not Signaling Lots Of Caution
On the other hand, another caution indicator—gold—hasn’t really been able to get much traction so far this week. Gold prices are down to just below their 100-day moving average of $1,475 an ounce, well off highs above $1,500 a few weeks ago. Also, the dollar, while still at relatively high levels, came under a little pressure this week, hurt in part by worries about pressure on the Fed to lower rates coming from the White House. In a tweet, President Trump also mentioned that the strong dollar is hurting U.S. corporations.
That strong dollar could continue to be a challenge for some of the major multinational companies as the next earnings season rolls around. We’re more than halfway through Q4, and the dollar decline seen earlier in the quarter looks like it hit a major roadblock, even with this week’s slight move lower.
Despite that and possibly some other obstacles like the trade war drama, it appears investors once again continue to embrace more of the cyclical sectors. Financials, Technology, and Industrials are near the top of the leaderboard over the last month, with Real Estate and Utilities bringing up the rear.
On the other hand, Consumer Discretionary and Energy (both cyclical sectors) got taken down yesterday on the back of disappointing earnings from HD and Kohl’s Corporation (NYSE: KSS), and by crude’s lackluster showing.
CHART OF THE DAY: PUTTING ON THE BRAKES. Over the last three months, crude futures (/CL-candlestick) haven’t been able to get much acceleration even as the Nasdaq (COMP-purple line) has climbed 7%. Some analysts are concerned that softness in crude, combined with weak business spending and trade disputes, could eventually start to pull down high-flying stocks, but that hasn’t happened yet. Data Sources: CME Group, Nasdaq.
Taxes and Spending: We’ve talked a lot lately about the soft business spending climate, and one mystery to some economists is why savings from the 2017 tax reform bill didn’t compute into more capital spending. A new study from FactSet shows that the sectors achieving the most tax savings under the plan were Communication Services, Utilities, and Consumer Discretionary—which enjoyed savings of 15%, 14%, and 12%, respectively, from 2016 to 2018. Perhaps surprisingly, capital spending over that same period rose just 6% for Communication Services, fell 1% for Utilities, and rose only 4% for Consumer Discretionary.
Another interesting takeaway is that capital spending actually rose the most for Materials, Energy, and Technology, even though those sectors were among those that saw the least benefit from the tax cuts. No legislation lives in a vacuum, however. It might be interesting to see if capital spending gets a boost once businesses have a set of trade rules they can live by. The trade war might be one factor restraining companies from new projects.
Taking a Conservative Road: We’re not talking politics here. We’re talking about the tone lately among retail investors. TD Ameritrade research shows a lot of the company’s retail clients have been kind of conservative over the last few months, and that might have implications for the market. While a lot of analysts wring their hands about record-high stock indices, it doesn’t appear to be a situation where everything’s getting frothy and investors are flocking to get in. Instead, retail investors seem to be taking more of a flat stance, with a lot of short-term interest rate plays.
A large portion of the interest-rate bearing trades seen lately have been for notes with maturities of six months or less. While you can’t necessarily make predictions about what this means, one possibility could be that people are parking their money where it’s relatively easy to access in case stocks take a stumble. That means one could argue that they might be looking to get back into the market at lower prices, not taking a bearish stance.
Home Mystery Hour: If you’re shaking your head after HD reported a disappointing quarter and outlook yesterday despite what appears to be an improved housing climate, you’re probably not alone. Consider that HD’s results came the same day that October housing starts and building permits both surprised to the upside, and it might sound like a mystery. Dig a bit deeper, though, and it’s not necessarily a case for Sherlock Holmes. Internal issues at the company, not a problem with the housing market, might be a possible cause for the discrepancy between business and economic fundamentals.
HD said in its press release that sales were below its expectations due to “the timing of certain benefits associated with...strategic investments,” and that “some of the benefits anticipated for fiscal 2019 will take longer to realize than our initial assumptions.” So, before getting downhearted about the housing market, maybe think of HD’s problems as not necessarily related and wait to see what competitor LOW says in its earnings call today. Also consider what homebuilder D.R. Horton Inc. (NYSE: DHI) said last week in its earnings call about the “good demand environment” it sees.
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