The S&P 500 May Be Breaking Away From The Suppression Of A Strong Dollar

(Tuesday Market Open) Equity index futures were slightly lower ahead of the opening bell as Walmart WMT and Home Depot HD topped earnings estimates but moved in different directions during the premarket session. 

Potential Market Movers

Walmart (WMT) rose more than 3% ahead of the opening bell after reporting better-than-expected earnings and revenue. The company has had inventory problems and reported that inventories were still 26% higher year-over-year. Those higher inventories have prompted the retailer to offer products at even deeper discounts.

WMT warned investors at the end of July that earnings would be lower because of its inventory levels and lower demand, which trimmed its stock price. However, as of yesterday, WMT had recovered those losses.

Walmart also offered insights into the strength of the consumer. While overall spending remains on track, the retailer said consumers are using credit cards more than debit cards at the register while focusing more on food than clothing.

Home Depot (HD) beat on top- and bottom-line numbers but fell more than 2% in premarket trading. The home improvement store recorded 3% fewer customer transactions last quarter which appears to have disappointed investors. However, the company reaffirmed its forward earnings guidance.

Beyond earnings news, Ally Financial ALLY was up 7% in premarket trading after reports that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) tripled its position to $1 billion at the end of June in the online auto and home lender. Berkshire also increased its holdings of Paramount Global PARA, Occidental Petroleum OXY, Chevron CVX, and Apple AAPL.

Speaking of Apple (AAPL), the company is pushing workers to come back to the office at least three days a week in an attempt to increase productivity. This could be a much more complicated ask because many workers chose to sell their homes and move away from company offices during the pandemic.

The latest building permits and housing starts reports provided new data on the slowing housing market. Housing starts fell 9.6% in July while building permits fell 1.3%. However, the number of building permits was higher than expected. The reports just underscore the trend that the housing market may be headed toward a pullback.

One worry around the weaker new homes market is that it could lead to the loss of high-paying construction jobs that could boost the unemployment rate while forcing laborers into lower paying employment. 

The S&P 500® index (SPX) is butting up against resistance around the 4,300 level which could lead to some consolidation in stocks as weaker economic news continues to come in. This morning, the German ZEW Economic Sentiment report was lower than expected in August, reflecting negativity from German institutional investors and analysts.  Germany’s news adds to China’s weaker economic data on Monday that that prompted China to lower key interest rates. With that said, the German DAX rose 0.26% overnight and the Shanghai composite closed 0.05% higher. 

Reviewing the Market Minutes

After a shaky start, stocks were able to close higher on Monday with the S&P 500® index (SPX), Dow Jones Industrial Average ($DJI), and the Nasdaq ($COMP) respectively closing 0.40%, 0.46%, and 0.57% higher. The major indexes were able to overcome disappointing manufacturing and housing news and weaker-than-expected data out of China.

The NY Empire State Manufacturing Index print was -31.30 a significantly more negative reading than the August projection of 5.5. It’s the lowest reading since May 2020 and the fifth time in the last eight months the report has been negative.

Housing took it on the chin with a lower-than-expected August NAHB Housing Market Index reading that helped push housing stocks lower as well. D.R. Horton DHI lost 1.13%, Pulte PHM was off 1.2%, and Lennar LEN fell 1 0.22% by Monday’s close as the PHLX Housing Sector Index (HGX) finished down0.30%.

While housing stocks fell, homebuyers may have gotten some good news. The 10-year Treasury yield (TNX) which correlates with mortgage rates, fell six basis points Monday to 2.79%.

Perhaps the biggest news story at the start of the market day was the People’s Bank of China’s key rate cuts due to increasingly poor economic data. The move sparked concerns over a weakening global economy and the potential for falling demand for energy products. WTI crude oil futures tumbled 2.7% settling at $89.35 per barrel, while natural gas futures dropped 1.1% and unleaded gasoline futures fell 2.5%. 

Three Things to Watch

MEMBERS ONLY: The market and members of the Federal Open Market Committee appear to be on different pages when it comes to the likely path of interest rates. The CME FedWatch Tool that uses the futures market to anticipate changes in the fed funds rate is still anticipating 50-basis-point hike in September and 25-basis-point increases in November and December. Then FedWatch is calculating rate cuts in July of 2023.

However, since the last rate hike in July, we’ve seen Fed members talking more hawkishly. St. Louis Fed President James Bullard said that he favored a “front-loading’ strategy sticking with bigger hikes and keeping rates higher longer to stop inflation. San Francisco Fed President Mary Daly said that the Fed is “nowhere near almost done” with raising rates. Cleveland Fed President Loretta Mester recently said she would need “compelling evidence” of significantly slowing inflation before changing her mind on increases while Chicago Fed President Charles Evans said he would be okay with 75 basis points in September while last week, Minneapolis Fed President Neel Kashkari said that he felt that the Fed still had a “long way” to go. Finally, Former New York Fed President Bill Dudley wrote a Bloomberg op-ed calling the market’s forecasts on moderating rates “wishful thinking.”

No one can tell the future, but the July FOMC meeting minutes release tomorrow will at least reveal the past. Investors will see if the Fed was as hawkish in their last meeting as they’re sounding in public.  

BYE BACKS? The Inflation Reduction Act passed the Senate and the House and is expected to be signed by President Joe Biden later this week. One controversial provision in the bill was a 1% taxation on stock buyback programs. Bloomberg reported that the new tax could incentivize companies to increase their share repurchases the second half of the year before the new tax kicks in next year. If this turns out to be true, the buying could help push stock prices higher over the next four and half months.

However, according to an article from Morningstar, the new tax could also disincentivize the use of share buyback programs starting next year. These programs have been popular among corporations and investors, but the change in the tax law could drive companies to focus on their dividends instead.

ALL THE TEA IN CHINA: Five state-owned Chinese companies are delisting from the New York Stock Exchange by the end of the month. Last Friday, China Life Insurance (LFC), PetroChina (PTR), China Petroleum & Chemical (SNP), Aluminum Corporation of China (ACH), and Sinopec Shanghai Petrochemical (SHI) issued separate statements announcing their intentions.

While each company cited “low turnover in the U.S.” and “high administrative burden and costs” as reasons for their departures, the announcement comes after all five were flagged by the U.S. Securities and Exchange Commission (SEC) for not meeting U.S. auditing standards.

This may be the tip of the iceberg as the SEC has similarly identified over 150 companies on a list that includes Alibaba BABA, JD.com JD, and Baidu BIDU. Chinese companies traded overseas are required by Chinese law to keep their audit documents in mainland China where foreign agencies can’t access them.

Notable Calendar Items

Aug 17: Retail sales, FOMC minutes, and earnings from Cisco CSCO, Lowe’s LOW, Analog Devices ADI, and Target TGT

Aug 18: Philadelphia Fed Manufacturing Index, Existing Home Sales, and earnings from Estee Lauder EL, Applied Materials AMAT, NetEase NTES, and Ross Stores ROST

Aug 19: Earnings from Deere DE, Foot Locker FL, and Buckle BKE

Aug 22: Earnings from Palo Alto Networks PANW

Aug 23: New home sales and earnings from Intuit INTU, Medtronic MDT, Advance Auto Parts AAP, Dick’s Sporting Goods DKS, and Toll Brothers TOL

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

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