More Records Shattered: Stocks Start Week At Record Highs With More Retail Earnings Next

The market no one seems to love just keeps going higher and higher.

It’s been an amazing run, with major indices making new highs Friday on the heels of earnings season, and the Dow Jones Industrial Average ($DJI) finishing last week above 28,000 for the first time. All this despite a flurry of headlines out there about possible problems the market could face ahead. It seems like everyone wants to talk this market down, but talk has been cheap over the last month.

While a lot of excitement toward the end of last week and again early Monday centered around China trade talks (which China’s Ministry of Commerce called “constructive”) and the opening of retail earnings season, what’s going on in earnings actually seems like it might be just as important.

For instance, JD.com Inc JD, an e-commerce company in China that competes against Alibaba Group Holding Ltd BABA, talked about Chinese consumer strength not just being in the major cities, but also in secondary ones. That would probably argue against those who say the trade war has really hurt China’s consumer base. It also could help point to what looks like consumer strength growing around the world, even in some places where you might not normally think of it happening.

Then there were earnings from the semiconductor space, where Nvidia Corporation NVDA and Applied Materials, Inc. AMAT earnings both surprised to the upside. Let’s face it: If there was any industry that analysts said would be most troubled by tariffs, it was the chip makers. Despite that, we see earnings beats and guidance going up for many of these companies.

Investors did take NVDA shares down Friday as some seemed disappointed by NVDA’s guidance. The outlook wasn’t great, but arguably it was pretty good. A lot of analysts upgraded or raised price targets for NVDA based on earnings, so looking only at the stock’s performance Friday might not tell you much. Overall, the semiconductor sector rose nearly 1% Friday.

The more interesting story for chipmakers is that gaming has become unbelievably powerful. Many companies in the space are also talking a lot about artificial intelligence (AI). When chip companies say AI is doing well and call out names like Walmart Inc WMT and Samsung, that’s exciting for the long-term and points out what they might be able to do in the future.

Before Turkey Day, More Earnings

Another boatload of earnings comes storming at us this week, with retail leading the charge. Target Corporation TGT, Home Depot Inc HD, Lowe’s Companies Inc LOW, Kohl’s Corporation KSS, and Macy’s Inc M are all getting ready to open their books before the Thanksgiving holiday. It starts tomorrow with HD and KSS, and it could be important for HD to come in strong to go along with what we’ve seen from the housing sector.

Another name to consider watching is Foot Locker, Inc. FL, scheduled to report on Friday. This could be an interesting story after Nike Inc NKE led the $DJI on Friday and had a great week as it raised its dividend.

What had appeared to be a quick rally toward 2% for the 10-year Treasury note got off track last week, with the yield starting the new week at 1.85%. That’s down from a peak of around 1.96% last week, but soft data from overseas might have weighed. This week we’ll see if yields can get their game back on, and, if so, what that might mean for the so-called “defensive sectors.” To this point, the yield seems to get a bit shy around that 2% level.

In one sour note to close the old week, industrial production fell for October. The damage was negative 0.5% excluding motor vehicles and parts, the government said. Data that might be worth watching this week include housing starts and building permits, along with University of Michigan sentiment for November. 

Wednesday afternoon brings minutes from the most recent Fed meeting. Those are probably going to be interesting for anyone trying to glean the Federal Open Market Committees’ (FOMC) latest thinking, particularly about how long a possible rate pause might last. With all the earnings and data excitement ahead, today might be a bit dull while people await news. 

Taking Off The Tariff Training Wheels

Some of the guidance from chipmakers and other companies has been a bit slower, but if there’s a tariff solution more possibilities could open up. A lot of companies have pent-up demand to spend money, but they’re reluctant to do it in this environment. Once tariffs land somewhere—and it doesn’t matter where—companies are more likely to go back and spend money because the fear will hopefully be off and they’ll know the rules of the game. Once you know the rules of the game, you can play.

The positive words on trade talks over the weekend and early Monday seem to be helping give stocks a fresh lift higher, but in reality nothing has changed. Words don’t matter as much as action.

Looking at sectors, Health Care led the way on Friday, rising more than 2% (see chart below). Humana Inc HUM, Danaher Corporation DHR, and UnitedHealth Group Inc UNH were among the stocks in that sector rising more than 5% after President Trump announced an executive order requiring price transparency from hospitals and insurers.

Technology stocks continue to charge ahead, with Apple Inc. AAPL, Alphabet Inc GOOG, and Microsoft Corporation MSFT outperforming the market. When this triumvirate catches fire, it’s often a sign of investor confidence in the economy since these three companies have such a broad reach between them.

Walt Disney Co DIS took a breather Friday but had a great week. The launch of Disney+ looked strong, and when you think about it, the company seems really well-positioned to thrive in that competitive environment. It also has the opportunity to gain market share thanks to its low price.

A lot of companies have to spend money on original content, but DIS has years of content they have the rights to, and that gives them a bit of a head start. They have shows and characters, and also the infrastructure. All this could conceivably help keep the momentum going.

Speaking of momentum, Boeing Co BA really picked some up last week amid hopes that it might be up and flying again with the 737 MAX by January. It’s amazing, when you think about the challenges they’ve had, that their stock didn’t even get beaten up more than it did so far this year. Many people thought it would be worse than it was. That’s not to say they’re out of the woods, as United Airlines Holdings UAL said last week it had extended the grounding of the plane until early March.

CHART OF THE DAY: HEALTHY RUN. Though Friday's rally was broad-based, with all sectors but one of the S&P 500 Index (SPX - purple line) finishing in the green, it was the Health Care sector (IVX - candlestick) that led the way. After President Trump announced an executive order requiring price transparency, many of the sector's big names took off to the upside. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Positive Thinking: It was good to see retail sales pop back in October after September’s slump. The 0.3% gain matched consensus views and could help bolster Q4 gross domestic product (GDP). It also reinforced investor impressions that consumers remain healthy. Another aspect that might be supportive now and in the months ahead is analyst estimates for improved earnings next year. The fact that earnings so far in 2019 have been pretty weak sets up a chance for relatively easy comparisons in 2020. Research firm S&P Global Market Intelligence forecasts 2020 S&P 500 earnings to climb 8.6% year-over-year, compared with just 0.7% in 2019. On the less rosy side, the firm sees Q3 earnings this year falling 1% and Q4 earnings falling 0.7%. Keep in mind, though, that many analysts expected Q3 earnings to drop 4%.

Will Chip Industry’s Players Stay in the Game? If you golf, you might remember 10 or 12 years ago when it was almost impossible to get on a course. These days, it’s much easier to reserve a tee time. What happened, and what does this have to do with chipmakers? Well, things go in cycles, and sometimes something gets really popular and attracts a lot of new people. After a while, the popularity falls, and you’re left with the diehards. That’s what we saw with golf, and it’s also what makes some semiconductor industry watchers nervous. Gaming is a big influence for these companies, and it helps their business a lot. NVDA had a good quarter with its gaming, for instance. But you have to hope that the “on-the-margins gamer”—kind of the gaming equivalent of the weekend golfer—stays on the course, so to speak. There will always be diehards with gaming and golf, but as a company (or a country club) you don’t want to rely only on them to keep your business healthy.  

Trade and Transports: While investors continue to watch every chess move in the U.S./China trade war, another trade battle seems to be coming toward a conclusion that might be market-supportive. Despite political rancor in Washington, U.S. legislators appeared to make progress in the ratification of the United States-Mexico-Canada Agreement (USMCA) trade deal, Reuters reported. This is one of those things that’s kind of gone under the radar amid all the other noise, but a conclusion could help ease uncertainty around two of the biggest U.S. trading relationships.

The U.S. exported $265 billion in goods to Mexico in 2018, up 537% from 1993, the U.S. government says, while exports to Canada topped even that at nearly $365 billion, or 18% of all U.S. exports. A couple of industries a deal might help are trucking and railroads. Both of these industries ship goods back and forth from the two countries, and also between them right through the heart of the U.S. (don’t forget Canada and Mexico trade goods with each other, not just the U.S., and the U.S. is in the middle). The Dow Jones Transportation Index ($DJT) has been trending upward over the last few months, but consider keeping an eye on it for a possible injection of fresh confidence if the trade talks show further signs of progress.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image by Ranjat M from Pixabay