Nervous Consumers Make for Nervous Market as Walmart, Home Depot Share Disappointing Outlooks

(Tuesday market open) Wall Street’s recent resilience could be tested today. Disappointing tidings from Walmart WMT and Home Depot HD joined pressure from the fixed income market and a rising dollar to push stock index futures into the red.

Before the long weekend, major indexes bent but didn’t break under selling pressure. However, it’s unclear how long the market can sustain “buy the dip” amid an ongoing hawkish drumbeat from the Federal Reserve and today’s corresponding rally in Treasury yields. Tomorrow’s minutes from the last Fed meeting will get a close look and could help set direction.

Weakness from some of the retailers reporting this morning is likely to drive concerns about the U.S. economy’s ability to weather expected additional Fed tightening.

Just In

Walmart earnings: WMT’s Q4 results easily beat expectations. It was their outlook that left a bad taste and sent shares down nearly 4% in premarket trading. WMT said it expects same-store sales to rise 2% to 2.5% in the fiscal year ahead, and its CFO told CNBC that “the consumer is still very pressured.” He called the company’s outlook “pretty cautious” for the rest of the year. That same-store forecast is well below WMT’s recent performance.

Home Depot earnings: Shares of the nation’s largest home improvement retailer also fell 4% in premarket trading but in HD’s case a disappointing Q4 combined with a soft outlook appeared to hurt the stock. Q4 revenue came in just shy of Wall Street’s estimates and the company said it expects earnings per share to fall by the mid-single digits in 2023 with flat revenue. This could show that the “do-it-yourself” trend is fading as people don’t see the benefit with housing prices slumping and sales softening. HD is one of those benchmark companies that’s often considered a proxy for consumer sentiment and particularly the housing market. Today’s HD outlook could weigh on housing-related stocks.

Seasonal update: Released before today’s reports, FactSet’s Friday wrap-up showed Q4 earnings continued to trend below average. More than 82% of S&P 500® companies have reported so far, and 68% of those have reported positive earnings surprises. That’s well below the five-year positive surprise average of 77%. Analysts expect average Q4 earnings to fall 4.7% year over year, a slight improvement from the ­–5% they’d expected a week earlier but still the worst in more than two years.

Morning rush

• The 10-year Treasury note yield (TNX) rose moderately to 3.88%.
• The U.S. Dollar Index ($DXY) remained near recent highs at 104.
• Cboe Volatility Index® (VIX) futures jumped to 22.54.
• WTI Crude Oil (/CL) is up a notch to $76.77 per barrel.

VIX futures fired a shot across the bow this morning, reaching their highest point since early January. This signals choppy waters ahead.

Eye on the Fed

Between speakers and meetings lately, the Fed just won’t give investors any peace. The next interruption comes tomorrow afternoon at 2 p.m. ET when the Fed releases minutes from its January 31 to February 1 meeting.

At that gathering, the Fed raised rates 25 basis points, down from 50 basis points in December. Recently, two Fed officials said it may be time to bring back 50-basis point hikes, considering recent stronger-than-expected inflation data. One thing to check in tomorrow’s meeting minutes is whether this even came up at the last meeting.

Consider how much the Fed didn’t know on February 1 that it knows now. That was two days before the January Nonfarm Payrolls report showed an immense 517,000 jobs created. It was before we knew that January Retail Sales climbed 3%. It was before last week’s disappointing inflation reports. The Fed, as the old rock lyric goes, might be wishing it didn’t know now what it didn’t know then.

Stocks in spotlight

Nvidia (NVDA), the semiconductor giant, reports tomorrow after the close. It’s been hard to find meaningful trends in chip earnings so far this year, with a big miss from Intel (INTC) even as Advanced Micro Devices (AMD) released a hit. Semiconductor shares are up more than 18% year to date, easily outpacing a 6% rise in the S&P 500 index (SPX).

Recent worries about central banks slamming the brakes harder raises concerns for NVDA and the sector as a whole. The industry already struggles with slower demand—both AMD and INTC expect sales declines in the current quarter—but there had been hope industry fundamentals could turn a corner later this year.

For NVDA specifically, successfully navigating this difficult environment might depend on the company’s exposure to artificial intelligence (AI), according to two analysts quoted by Barron’s last week. They think NVDA is well insulated thanks to its business providing chips to AI developers, which may come in handy longer term if NVDA’s data center forecasts disappoint tomorrow, Barron’s noted.

Retail earnings: Big boxes dominate this week. We previewed the retail earnings season recently, noting that the reporting period covered a tough December for many firms. Now we’ll find out if that icy end to 2022 had a negative impact on cash registers.

One thing to remember is that retail is far from monolithic. Different stores cater to various types of customers and sell a cornucopia of goods. If one retailer you follow had a bad quarter, things could be very different for another around the corner.

What to watch

Existing homes: January Existing Home Sales are due today soon after the open. Seasonally adjusted sales in December fell to 4.02 million, down from nearly 4.78 million in August. Total sales fell a steep 34% from a year earlier. One interesting tidbit about December that’s worth checking for possible follow-through in January: First-time buyers accounted for 31% of sales, up from 28% the prior month. The percentage of first-time buyers dropped dramatically over the last decade as home prices climbed. One month isn’t a trend, of course, but if this particular metric starts rising, it could be a positive sign for the real estate industry that more people are moving from renting to buying.

Mortgage market: The Mortgage Bankers Association’s Weekly Applications Survey is getting more than its fair share of attention lately thanks to a sudden jump in mortgage rates. Last week, it fell 7.7% after a 7.4% drop the prior week, implying that the little January rally in housing demand may be fading. The next report is due tomorrow morning before the open.

Data docket: Thursday morning brings the government’s second estimate of Q4 Gross Domestic Product (GDP), followed Friday by the January Personal Consumption Expenditures (PCE) price index, Personal Income, and Personal Spending. We’ll preview GDP tomorrow.

Market minutes

Here’s how the major indexes performed Friday:

• The Dow Jones Industrial Average® ($DJI) climbed 129 points, or 0.39%, to 33,826.
• The Nasdaq Composite® ($COMP) dropped 0.58% to 11,787.
• The Russell 2000® (RUT) rose 0.21% to 1,946.
• The SPX fell 11 points, or 0.28% to 4,079.

After all the selling last week amid heightened inflation and rate concerns, the SPX is down only about 2.4% from its peak 2023 close of 4,179 on February 2.

However, its forward price-to-earnings  (P/E) ratio of 18 could keep investors antsy going forward. That P/E is above the historic average of around 16, and the “P” component of the equation might start looking shaky if analysts use the excuse of “higher rates for longer” to slice their 2023 earnings estimates.

Glancing back at Friday’s performance by the major indexes, one word comes to mind: resilient. In fact, Friday’s close demonstrated far more resilience than expected after Thursday’s selloff.

“Buy the dip”—which evaporated Thursday following the bearish January Producer Price Index (PPI) report and another lower-than-expected jobless claims number—came back late Friday against all odds. The leaders were a little different, though.

Growth sectors like energy and info tech that led January’s buying stayed on the sidelines late Friday as investors stuck to defensive and value areas of the market like staples, utilities, and health care. Those sectors are still laggards over the last month, but Friday’s action suggests investors are taking a more cautious approach when they dip back into the market. It’s something to watch this week.

Deere (DE) led SPX gainers Friday after its solid earnings, followed by a bevy of health care and staples names including GE HealthCare Technologies (GEHC), Baxter International (BAX), Amgen (AMGN), Merck (MRK), and Colgate-Palmolive (CL). With the exception of Tesla (TSLA), tech mega-caps were nowhere to be found on leader lists.

Getting granular: You may know what volatility is, but what’s the “volatility of volatility?” Find out how and why to track the Cboe VVIX Index in this Charles Schwab guide.

Talking technicals: Once again, the SPX dove below key technical support levels Friday only to power back and close just above 4,075, one of those support points. That was a bullish development, though it doesn’t promise follow-through. The 50-day moving average of 3,977 remains above the 200-day moving average of 3,943, suggesting the upward technical trend remains intact. 

Thinking Cap

Ideas to mull over as you trade or invest

Watch your wallet: The $DXY is on the move, climbing solidly above 104 late last week for the first time since early January. We’re still a long way from highs near 115 last autumn that really spooked investors in U.S. multinational companies, but a rallying dollar is often a sign of investor caution as Treasury yields climb. It’s not typically a positive development for stocks, especially multinational companies that rely significantly on overseas revenue, typically focused in sectors like info tech, industrials, and materials. However, a number of analysts remain more bullish on European stocks than U.S. stocks this year, citing—among other things—generally lower valuations across the pond. From a technical perspective, 106 looks like a key chart level to watch for $DXY. A move above that could cause short covering to accelerate, potentially leading to higher values.

Everyone is above average: Despite recent topsy-turvy trading, the bulls on Wall Street seem to remain in control. That’s the takeaway when we note that 60% of S&P 500 stocks still trade above their 50-day moving averages, according to the thinkorswim® platform. When the percentage of stocks trading above their 50-day average gets really high—say above 90% as we saw last November and last August—that can sometimes be a sign of the market being overbought. The current level isn’t far above the average over the last 200 trading days of 48%, but it’s well below the nearly 80% seen at the start of February. Looking back, recent moves in this metric above 80% didn’t last long, making it potentially worth watching if you trade regularly.

Five candles for Powell: Fed Chairman Jerome Powell’s semi-annual testimony to the Senate Banking Committee is March 7. More on that to come, but it’s worth noting that Powell recently celebrated five years as Fed chair. He’s now about a quarter of the way through his second four-year term, and has served longer than predecessor Janet Yellen. The Federal Open Market Committee (FOMC), which Powell chairs, recently saw a major change when President Biden appointed Fed Vice Chair Lael Brainard to a White House post. The move came at an auspicious time as the March FOMC meeting approaches and possibilities of a half-point hike gain traction in the futures market. Will Powell, known by some to favor incremental moves and not shaking things up, argue for a more stair-step approach of 25-point hikes, and will the more dovish Brainard’s departure give more life to any “50-pointers” on the FOMC? We’ll wait to see.

Calendar

Feb. 22: MBA Weekly Applications Survey and expected earnings from TJX Companies (TJX), Nvidia (NVDA), and Baidu (BIDU)

Feb. 23: Q4 GDP second estimate and expected earnings from Alibaba (BABA) and PG&E (PCG)

Feb. 24: January PCE Prices, January Personal Income and Personal Spending, January New Home Sales, and final February University of Michigan Consumer Sentiment Index

Feb. 27: January Durable goods orders, January Pending Home Sales

Feb. 28: February Chicago PMI, February Consumer Confidence, and expected earnings from Target (TGT), Ross Stores (ROST), and HP (HPQ)

 

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

 

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