Earnings Season Continues With Walmart, Deere Among This Week's Headliners

The market is putting its best foot forward to start the week, but that doesn’t mean caution has left the room.

There’s a sense of continued progress on the COVID-19 front, with the vaccination pace gathering steam and many health experts expecting the rate to improve. When you add that to falling virus caseloads, strength in Asian markets, and an improved U.S. earnings picture, many factors continue to drive this reopening and reinflation trade.

Here’s where the caution comes in: The U.S. 10-year Treasury yield hit an almost one-year high of 1.24% this morning while the 30-year continued to hold above 2% and the spread between shorter-term two-year yields and longer-term 10-year yields is the widest since 2017. Some of the yield strength might reflect growing confidence that Congress could pass a $1.9 trillion stimulus bill sometime next month.

No one knows exactly where it is, but there’s always a tipping point with yields, and the pace of the yield gains does matter. If we continue to see large spikes in yields, that’s something that could become problematic for markets. For a sense of how that can play out, look back at the 2013 “taper tantrum” in the financial markets. Higher yields can lead to tightened financial conditions, so it’s something that merits monitoring.

Another thing to keep in mind is that stimulus isn’t necessarily a done deal. There’s debate about whether it should include a $15 minimum wage, and not all Democrats support that. The party has a razor thin edge in both the House and Senate, so we’ll see where that intra-party battle goes.

Today’s strength came after the market showed signs of consolidation late last week, with the long surge running into a little fatigue. That being said, almost all of the S&P 500 sectors rose over the last five days, including big gains for Energy, Info Tech, and Communication Services. Semiconductors have also been on a roll, even though some of the “mega-cap” Tech stocks like Apple Inc AAPL and Amazon.com, Inc. AMZN have been lingering short of all-time highs. 

In another sign that some investors continue to embrace risk, bitcoin flirted with $50,000 this morning. At the same time, the U.S. dollar—which investors sometimes embrace when they’re nervous—fell to a four-week low.

Crude Hits New Rally Milestone

Shivering yet? You’re not alone, with the polar vortex extending its icy fingers all the way down to southern Texas early this week amid record cold. It’s not good weather for going outside, or for refining oil, it seems. U.S. crude prices pierced the $60 a barrel mark for the first time in a year on Monday after the largest oil refinery in North America shut down due to weather conditions that disrupted power, water and fuel supplies across Texas.

Motiva Enterprises LLC is halting operations at its refinery in Port Arthur, Texas, Bloomberg reported. South of Houston near Galveston Bay, Marathon Petroleum Corp MPC shut its refinery in response to the chill, Reuters reported. It’s one thing to see wintry conditions in northern Texas, but to see it in the southern parts of the state like we are now is pretty extreme, and the energy sector just didn’t appear to be ready. 

The last time U.S. crude was $60 was when tensions flared early last year between the U.S. and Iran, and before Covid sent commodity prices to the basement for months. Since summer, it’s been an incredible climb, even before the refinery news pushed prices above $60. Higher crude tends to be a good sign of stronger economic demand, which is normally a good thing. But with the economy still pretty fragile, there’s worry about rising gas prices potentially hurting family budgets that are already reeling.

Front-month U.S. crude futures have nearly doubled since November, when they hit a recent bottom near $33 a barrel. On the other hand, gasoline futures have risen much more slowly, up about 75% since the time crude bottomed. This could reflect typical soft winter demand from U.S. drivers, but keep in mind that driving tends to pick up a lot once spring comes. That means gas prices could catch up with the crude rally relatively soon, especially if the economy manages to fully emerge from Covid-related lockdowns. Low gas prices now may be fleeting.

No End In Sight To Company Reporting Season

Earnings this week include Hilton Hotels Corporation HLT, Marriott International Inc MAR, and Hyatt Hotels Corporation H. These stocks are ones some analysts believe can do better as travel, along with the economy, recovers. So it could be interesting to hear what their executives are currently thinking about the state of things as the pandemic continues.

On the other end of the spectrum, investors are scheduled to hear from the stay-at-home trade when Shopify Inc SHOP opens its books. The company has been helped as the pandemic has accelerated the move toward e-commerce. 

Retail giant Walmart Inc WMT and equipment manufacturer Deere & Company DE are also scheduled to report, likely providing a glimpse into their respective parts of the economy. WMT could shed light on how middle-income shoppers are doing while DE could help investors get a clearer picture of what’s happening with agriculture and manufacturing. 

WMT is the big gorilla this week when it unveils fiscal Q4 results Thursday morning. The COVID-19 pandemic helped catapult WMT and its e-commerce site to top of mind for many consumers who might otherwise not have shopped there, and WMT has said it intends to keep those new customers coming and those faithful standbys loyal.

As WMT continues its battle against Amazon.com, Inc. AMZN on books, apparel, home goods, and, increasingly, groceries, WMT has been unloading a number of new initiatives that are costing it money while adding perks and other efficiencies. Analysts will probably want to hear how all that is shaking out. 

On the economic data front, this holiday-shortened week actually includes some pretty high profile reports. After a relatively light Tuesday, Wednesday’s schedule includes January retail sales (see more below) as well as January producer price data. Later tomorrow, the Fed is scheduled to release the minutes from its January Federal Open Market Committee meeting.

We’re also scheduled to get new glimpses into the housing market with the release of January data for housing starts, building permits, and existing home sales. It could be interesting to see how low interest rates as well as higher prices caused by tight supply have continued to affect the housing market. 

Another piece of data to monitor is Friday’s release of Flash PMI for both Europe and the U.S., which will give clues into whether purchasing managers are seeing improving business conditions. We’ll talk more about those reports later this week.

CHART OF THE DAY: OIL’S GETTING ATTENTION. Expectations of a global recovery plus frigid cold temperatures in some parts of the country could have fueled a rally in crude oil (/CL—candlestick) prices as it went above $60 per barrel. It’s now coming close to its $64 resistance level (yellow line) which it has hit a few times since 2019. We haven’t seen these levels in /CL since Jan. 2020, just before the pandemic. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Who’s Been Out Shopping? Last time out, retail sales for December ended up being a big disappointment. The headline figure fell 0.7% from November, but the decline was a steep 1.4% when you stripped out automobiles. It’s likely the weakness reflected the same lockdowns that hurt December and January jobs growth. The dwindling of some stimulus unemployment benefits might also have hurt. So it’s kind of surprising that analysts expect a nice January rebound in this closely watched report when it comes out tomorrow morning. The consensus is for an overall increase of 0.8% from December, and 0.7% without automobiles, according to research firm Briefing.com. That would be the best monthly performance and first sequential increase since September. 

What’s driving this? Well, for one thing, the comparison to December is pretty easy, which can make this report look a little better than it is if you don’t dig in beyond the headlines. Once you unpeel the skin, look for any trends that might signal some real improvement. For instance, retail sales of durable goods rose in November and December, climbing 0.9% in the final month of 2020. Also, building materials had a nice December bump, so let’s see if that continued in January. 

February’s Cold Could Ice Future Data: Here’s something else to consider going into tomorrow’s retail sales report and the retail earnings season: It’s not going to show up in tomorrow’s data or any earnings reports now, but the severe winter weather most of the country is suffering from now could end up weighing on retail sales a bit when the February report comes out next month. In some ways, weather doesn’t have as big an impact on shopping habits as it used to, considering almost anyone can order nearly anything right from their homes.

That’s true for smaller items, anyway, but big stuff like cars, washers and dryers, and other major durable goods people are more likely to buy in person do have an outsized impact on total sales because of their higher prices, so be on the lookout in a month for possible disappointment. Also, if February ends up being a total snow-out, so to speak, it could potentially weigh on overall Q1 economic activity captured by the government’s gross domestic product (GDP) numbers. 

Epilogue of a Bubble—The Nikkei’s Slow Road to Recovery: In late 1989—over 31 years ago—the Nikkei 225 Index (N225:JP) top-ticked at 38,957 just before the Japan bubble burst. Since then, a number of factors, including stubborn deflation, an aging workforce, and the rise of China and other Asian manufacturers as an alternative to what was then called “Japan, Inc.” have kept the Nikkei from returning to its glory days. But it crossed a milestone yesterday on its slow road to recovery, eclipsing the 30,000 mark for the first time in 25 years. After struggling along with the rest of the global economy in the early days of the pandemic, Japan has come raging back, reporting yesterday that its economy grew at a 12.7% annualized growth in Q4. This came on top of a record 22.9% rise in Q3, according to Nikkei Asia.   

There’s a lot of talk these days about bubbles—whether certain asset classes or sectors are in one. The Nikkei serves as a reminder that bubbles come and go, but nothing lasts forever, and on a long enough timeline—decades or more sometimes—an asset with residual value can thrive anew after the burst.  

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Photo by Micheile Henderson on Unsplash