Pre-Holiday Earnings Banquet: More Strength from Retailers as Best Buy, Dick's Sporting Goods Impress

(Tuesday Market Open) After getting clipped by falling mega-cap stocks and sinking oil prices Monday, stocks showed a bit more holiday cheer early Tuesday following solid retail earnings news and sinking volatility. Fed speakers on the schedule later could help determine whether the good mood lasts.

With this morning’s earnings news behind us and no major data until tomorrow, it could be one of those random, headline-driven days. One thing to look out for is whether Fed speakers say anything that shakes the market, the way St. Louis Fed President James Bullard did last week. He talked about rates perhaps needing to rise to between 5% and 7% before the Federal Reserve could ease its inflation fight. But lately, other Fed speakers have sounded more dovish.

Two more Fed speakers are on schedule today before tomorrow afternoon’s release of Federal Open Market Committee (FOMC) minutes. Yesterday, Cleveland Fed President Loretta Mester told CNBC that recent milder inflation data was “good news,” but not convincing enough to stop the cycle of rate hikes. She did say, though, that the pace of rate hikes could slow. The CME FedWatch Tool shows 75% odds of a 50-basis point December rate hike, and better than 50% odds of another 50-basis point hike in February.

Yesterday was another tough one for technology stocks and for semiconductor shares in particular. Chalk it up in large part to China’s continuing COVID-19 issues, which are also hurting big stocks like Apple (AAPL). Mega-caps were flat to slightly higher in premarket trading this morning, perhaps implying less pressure, at least for now, from Wall Street’s behemoths.

Morning Rush

• The 10-year Treasury yield (TNX) fell two basis points to 3.8%.
• The U.S. Dollar Index ($DXY) is down 0.32% to 107.49.
• Cboe Volatility Index® (VIX) futures are trading below 23 and hit their lowest level since late August.
• WTI Crude (/CL) is back above $80 per barrel, recently trading at $81.36.

The VIX is below 23, significantly beneath the 30-plus level many investors were used to in October. That doesn’t mean we’re out of the woods on volatility, according to Randy Frederick, Managing Director of Trading and Derivatives at the Schwab Center for Financial Research. The 20-30 range “implies high uncertainty but not high anxiety,” he wrote.

VIX remains well above its long-term average, which is below 20. At the end of last week, VIX was 23.55, implying an average daily move of around 49 points in the S&P 500 Index® (SPX). The key takeaway, according to Frederick? “I see the VIX as still neutral in the very near-term for the equity markets,” he said.

Just In

Best Buy (BBY) defied anyone who thought consumers might pull back on electronics purchases, despite rising inflation. It beat Wall Street’s earnings and revenue expectations, and also guided for a slightly improved outlook, keeping its holiday season expectations unchanged. The market took that as a victory, sending BBY shares up 7% in premarket trading. However, the stock is down 30% this year going into Tuesday.

In other retail earnings, Dick’s Sporting Goods (DKS) surpassed analysts’ estimates and raised its outlook. Shares, however, only got a 1% bump ahead of the opening bell.

We’re most of the way through these earnings from retailers, and all in all, mostly it’s been a decent quarter for them, not withstanding some unpleasant tidings from Target (TGT) and Kohl’s (KSS). The question some analysts are asking is whether consumers will continue their shopping after the holidays, especially with inflation still gripping the economy. One barrier could be the declining “wealth effect,” in which falling stock and home prices make people less willing to spend. It’s something to contemplate heading into 2023.

On the wrong side of the earnings pendulum today is Medtronic (MDT). The medical company cut guidance due in part to foreign exchange headwinds, and also cited “slower than predicted procedure growth and supply recovery.” Shares fell 5%.

Data-wise, it’s a quiet morning, but tomorrow is anything but.

Potential Market Movers

Bring your appetite tomorrow. The preholiday spread includes October New Home Sales, October Durable Orders, and November’s final University of Michigan Consumer Sentiment reading. Any of these reports could swing some weight in what may be thin, preholiday trading as Thanksgiving approaches.

And then there’s the latest Federal Open Market Committee (FOMC) minutes due out at 2 p.m. ET Wednesday. Many readers might find FOMC reading a bit dry, but it usually has some tasty nuggets.

• New home sales follow a slew of weak housing data, and analysts don’t expect any major rebound in tomorrow’s report. The consensus on Wall Street is for seasonally adjusted sales of 578,000, down from 603,000 the prior month, according to research firm Briefing.com. They fell nearly 11% in September even as the median sales price increased nearly 14%.
• Look to see if September’s dynamic of relatively strong sales growth for high-end homes and weak growth for less expensive homes continued in October. No single report is ever a trend, but September’s data indicated that luxury homebuyers are in good shape even as lower-income buyers grapple with rising mortgage rates and still-short supplies of affordable homes in many areas.
• Final November Conference Board Consumer Sentiment is likely to be even with the four-month low headline figure of 54.7 reported earlier in the month, according to research firm CFRA.

The Federal Reserve won’t meet again until December 13-14, but as mentioned, November’s FOMC meeting minutes may offer some clues as to where the next gathering might head. If any FOMC members were arguing for a slower or smaller series of rate increases to tame inflation earlier this month, this document is likely to tell us. It could also provide insight into the Fed’s view on inflation and whether its policies were starting to impact prices.

With so much data on Wednesday and many market participants already away for the holiday weekend, be prepared for possible market volatility if the report has any surprises. Thin trading can sometimes deliver more dramatic price swings.

The markets are closed Thursday for Thanksgiving and trading will end early at 1 p.m. ET Friday.

Reviewing the Market Minutes

The week started off with a whimper Monday, hurt in part by weakness in mega-cap stocks like Tesla (TSLA) and Apple (AAPL). Both could see their businesses hurt by China’s continued “zero-COVID” policy as fresh news of pandemic caseloads, deaths and lockdowns circulated this week.

Here’s how the major indexes performed Monday:

• The Dow Jones Industrial Average® ($DJI) fell 45 points, or 0.13%, to 33,700.28.
• The Nasdaq Composite® ($COMP) pulled back 121.55 points, or 1.09%, to 11,024.51.
• The Russell 2000® (RUT) dropped 10.59 points, or 0.57%, to 1,839.14.
• The SPX dipped 15.4 points, or 0.39%, to 3,949.94.

Talking Technicals: Holiday week trading can sometimes be volatile, but Monday didn’t fit that description. The SPX traded within a very narrow range—compared to recent performance—with just 29 points separating the daily high from the daily low. The SPX bounced off a technical support level near 3,930 at its intraday low, so some of the resilience we saw last week appears to still be in place. The SPX, however, remains well below its 4,028 November peak.

Monday’s rangebound session was nothing new for the SPX. It hasn’t closed below 3,900 or above 4,000 since November 9. That makes eight straight days of closes in the “3,900-handle.” There hasn’t been a similar stretch for the SPX in a single handle since early August, and that particular period of consolidation was followed by a rally. However, past performance doesn’t guarantee future results, as you’ll often hear. 

CHART OF THE DAY: FRIENDLIER SKIES? Airline shares, represented here by the ARCA Airline Index (XAL—purple line), had a nice run back in October when several airlines forecasted better travel demand. They didn’t get much more lift after that. Things could change if WTI Crude (/CL) spends more time at current low levels, considering fuel is one of the largest expenses for airlines. That being said, crude and airline stock performance aren’t always directly linked. During past times of high fuel prices, airlines have sometimes performed surprisingly well. Data sources: CME Group, NYSE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Relief at the Pump? Americans have struggled with gas prices of $3.50 or higher for almost a year now, but relief may be on the way—at least temporarily. WTI Crude (/CL) plunged below $76 per barrel for a short time intraday Monday for the first time since the very first trading day of 2022. This came amid more China COVID-19 shutdowns and after The Wall Street Journal reported that OPEC and its allies may consider raising production at the December 4 meeting of the cartel. That particular bit of information was challenged by analysts and by Saudi Arabia, causing crude to come back later in the day. It spent plenty of time below $80, however.

There’ve been other false starts, but perhaps the recent weakness is a sign that the market is finally emerging from this long period of crude pumping up inflation. Tomorrow’s Fed minutes from the November 1-2 meeting won’t reflect the sudden drop in Crude from close to $90 per barrel then to below $80 now. It might be good to keep that in mind tomorrow when reading what FOMC members said then about the inflation picture.

One Problem: Gas prices might be falling, but don’t celebrate too early. U.S. crude stocks remain near five-year lows, according to the Energy Information Administration (EIA), meaning any quick change in demand or geopolitical circumstances could lift prices quickly with so little supply in the tank. Also, we’re nearing the price level where the Biden administration has said it would consider buying crude to refill supplies removed from the Strategic Petroleum Reserve (SPR) over the last year. Government buying, if heavy, could counter the downtrend in prices. Also, airlines and large trucking firms, which tend to buy their crude ahead of time, may find today’s prices worth locking in. That could mean a quick rise in futures prices. Even so, lower crude futures and potentially cheaper gas (it’s below $3 per gallon in parts of the country) could be a welcome development for U.S. retail firms ahead of the holidays, with Black Friday hours away.

Black Friday’s Future: While (Black Friday—the day after tomorrow—traditionally marks the start of the holiday shopping season, signs point to it being less influential than it once was as a barometer of consumer enthusiasm. Just 20% of consumers said they’re planning to shop the day after Thanksgiving this year, down from 60% in 2015, Barron’s reported, citing data from PwC. Instead, the discounting season now “sprawls” across the entire second half of the year. Firms like Target (TGT) and Walmart (WMT) launched sales events in early October, and Amazon (AMZN) launched a new Prime sale event that month. Furthermore, retailers sat on $740 billion worth of inventory as of September, Barron’s noted, up 22% from a year earlier. Several big-box stores reported progress carving through some of that inventory when they held their Q3 earnings calls, however.

Notable Calendar Items

Nov. 23: November Final University of Michigan Sentiment, Federal Open Market Committee (FOMC) meeting minutes, October Durable Orders, October New Home Sales, and expected earnings from Deere (DE)

Nov. 24: Markets closed for Thanksgiving, reopening November 25. Have a great holiday!

Nov. 25: No important earnings or data scheduled

Nov.28: No important earnings or data scheduled

Nov. 29: November CB Consumer Confidence and expected earnings from Hewlett Packard Enterprise (HPE)

Nov. 30: Chicago PMI, October Pending Home Sales, Q3 Gross Domestic Product (second estimate), and expected earnings from Hormel Foods (HRL) and Salesforce (CRM)

Dec. 1: October Construction Spending and expected earnings from Kroger (KR)

Dec. 2: November Nonfarm Payrolls and expected earnings from Cracker Barrel (CBRL)