Consumer Health in Focus After Data Shows Spending Pullback Last Month

(Friday Market Open) The S&P 500® is up 2% this week and more than 5% so far in January, but the market’s “wall of worries” hasn’t disappeared. The latest concern, fresh off the presses this morning, is all about the consumer.

Today’s Personal Consumption Expenditures (PCE) price data showed more moderation on the inflation front, but other numbers raised concerns about consumer enthusiasm. Stock index futures, which were lower ahead of the data, initially extended losses as investors mulled what looks like a pullback in spending and a rise in savings.

PCE prices rose 0.1% in December when analysts had expected a flat reading. The core PCE price figure that strips out food and energy rose 0.3%. Consensus was 0.2%. The Fed is slowly but surely making progress bringing down price growth.

The troubling aspect in today’s report was personal spending falling 0.2% in December while personal income rose 0.2%. This reinforced impressions that consumers are pulling back. There seems to be a lot of uncertainty about the consumer end of the economy, and it’s showing up in the actual data. Consumer spending makes up about 70% of the economy, so this isn’t immediately good news for stocks.

The coming week brings a banquet to the earnings table in what’s been a mixed Q4 reporting season to date. Yesterday afternoon, chip maker Intel INTC became the latest large company to disappoint investors. Just for kicks, a Federal Open Market Committee (FOMC) meeting is also on tap next week.

Morning rush

• The 10-year Treasury yield (TNX) inched up 3 basis points to 3.54%.
• The U.S. Dollar Index ($DXY) is trading at just above 102.
• Cboe Volatility Index® (VIX) futures moved up slightly to 18.95 but remain near 52-week lows.
• WTI Crude Oil (/CL) climbed 1.4% to $82.15 per barrel.

Up next

The week ahead will probably be one of the busiest of the quarter. The FOMC delivers a rate decision on Wednesday, followed by earnings from four mega-cap tech companies Thursday. Friday wraps things up with January’s Nonfarm Payrolls report.

Key companies expected to report next week include Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Meta (NASDAQ: META), Starbucks (SBUX), McDonald’s (MCD), Pfizer (PFE), and UPS (UPS).

At times like this, it’s often best to sit back and watch rather than try to trade the news. Markets could move quickly, and investors don’t do themselves any favors trading on emotion. It’s easier to make that mistake out of fear when the market heads south after a bad print from a major company, as we saw earlier this week with Microsoft (NASDAQ: MSFT). The weakness that followed on Wall Street, however, didn’t last long. Anyone who quickly sold MSFT based on the news might’ve regretted it by Thursday.

It’s going to take a few days to digest all the data coming at us, so hold tight and remember to closely listen to earnings conference calls from companies you own or are evaluating. Sometimes, those calls can be much more useful than the earnings data themselves.

The post-FOMC press conference Wednesday afternoon from Fed Chairman Jerome Powell could spark volatility, another reason to keep your powder dry. Several times recently, the market’s moved one way immediately after a Fed rate decision, only to whiplash in another direction as Powell talks. Don’t get caught up in the fray. We’ll discuss specifics to watch from Powell as well as from the payrolls and big tech companies early next week. Stay tuned.

Earnings scorecard

Intel INTC investors got more bad earnings news yesterday, causing shares to sink more than 10% in premarket trading.

INTC, which fell nearly 50% last year, had been edging higher in 2023 before missing Wall Street’s expectations with its Q4 results. Earnings per share (EPS) of $0.10 was well below the $0.21 consensus, and revenue of $14 billion came up short of the $14.49 billion consensus. INTC also issued a forecast for Q1 that was well below consensus.

In its press release, INTC referred to “economic and market headwinds” and “short-term challenges,” but said it’s taking steps to “right-size” the organization and “rationalize investments.” All that is probably sensible from a business perspective, but it may not be the type of news that draws in investors.

The question today is whether INTC’s struggles might spill over into the rest of the semiconductor sector, which struggled mightily last year before a recent rally in chip stocks. Shares of Advanced Micro Devices AMD, a close competitor of INTC, fell 3% in premarket trading.

Before the open, Salesforce CRM named three new independent directors after Elliott Management Corp. made a move to reseat members on CRM’s board of directors. The activist investor and fund manager recently took what media reports describe as a multi-billion dollar stake in the business software leader, setting up what could be a battle for control of a Dow 30 company. Will that quiet things down? Stay tuned. 

Data redux

The 5.6% rise in December Durable Orders reported yesterday raised some eyebrows, but it actually wasn’t as strong as it sounded.

That’s because when you hone in on durable goods orders excluding transportation, they actually fell 0.1% month over month. Overall manufacturing was “quite subdued” in December, research firm Briefing.com noted, evidenced by a 0.2% decline in nondefense capital goods orders excluding aircraft, which is a proxy for business spending.

Thinking cap

Earnings from Capital One Financial COF earlier this week provided insight into how well the consumer is really doing.

• COF increased its provisions for credit losses by $747 million to $2.4 billion in case its loan defaults head significantly upward. This number was well above analysts’ expectations.
• COF isn’t alone. Some of the largest U.S. banks have reported similar preparations as data piles up that people are using more credit and savings to finance spending. That’s not something that can continue indefinitely.
• It’s also something that speaks to the profit outlook for the banking industry in general. Few were surprised when banks rapidly expanded their loan loss reserves when COVID-19 hit the economy in 2020. But the government pandemic relief, which softened that blow, is over now. To see banks continue adding to loan reserves in 2023 after record-setting inflation is a different story for investors hoping financials can build on low valuations.
• Every time banks increase loan reserves, they hurt their profit outlooks and also take away resources that arguably could’ve been used to build their businesses, make acquisitions, or award investors with dividends and buybacks. It’s a responsible thing to do, but not one that investors necessarily welcome.
• And that gets us back to worries about recession, which didn’t go away despite yesterday’s strong data that included better-than-expected Q4 Gross Domestic Product (GDP) growth of 2.9% and December New Home sales rising a seasonally adjusted 616,000, up from a revised 602,000 in November and above Wall Street’s consensus view.

There continue to be reasons for concern about the economy, according to recent commentary from Charles Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.

Reviewing the market minutes

The S&P 500 index (SPX) posted its highest close in nearly two months yesterday, carried along by a broad rally that lifted nearly every sector. The only one left out was consumer staples, a defensive part of the market that tends to do best when people worry about a softening economy.

Softening wasn’t necessarily on investors’ minds Thursday following the better-than-expected Q4 GDP report and an in-line December New Home Sales report. While mega-cap tech stocks like Tesla (TSLA), Microsoft (MSFT), and GOOGL joined various energy sector names among the top performers Thursday, the housing industry also made some gains and so did some major banks. These are the kind of stocks that do better when the economy is showing some zip, which it appears to be doing—for the moment.

Chevron (CVX) had a big day, rising nearly 5% after announcing it’d buy back $75 billion in shares, about 20% of its outstanding shares on the market. Energy led all sectors yesterday but isn’t in the top-five year to date. Communication services, consumer discretionary, and info tech lead all S&P sectors in performance so far this year, and the SPX is up nearly 5%. Still, that’s only about half as good as the Nasdaq Composite® ($COMP), up nearly 10% year to date.

Here’s how the major indexes performed Thursday:

• The Dow Jones Industrial Average® ($DJI) climbed 205 points, or 0.61%, to 33,949.
• The $COMP rose 1.76% to 11,512, just below its 200-day moving average of 11,516.
• The Russell 2000® (RUT) rose 0.67% to 1,903.
• The SPX gained 44 points, or 1.1%, to close at 4,060. 

CHART OF THE DAY:  HEAD JUST ABOVE WATER. The S&P 500 Index (SPX—candlesticks) remained above a downward trendline (red line) after piercing it earlier this week. This looks constructive technically. It’s also managed to stay above the 200-day moving average (blue line). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Talking technicals: The chart above indicates the SPX has recently turned a technical corner. It’s spent the last four sessions above a downtrending line that tracks last year’s peaks, and it’s also holding itself above the 200-day moving average, which now sits near 3,960. The main resistance point is, not surprisingly, 4,100. That’s a level the SPX tested in December and immediately lost its footing. Recent lows just below 3,900 would likely form support on any major downturns.

$COMP eyes key level: Just over a year ago, on January 18, 2022, the $COMP closed below its 200-day moving average for the first time since April 2020. It hasn’t closed above the 200-day average since but took a big step in that direction on Thursday when it closed just three points below it at 11,512. A big test today will be to see if it can nudge above the 11,515 mark to get back on the positive side of that technical indicator. Many chart-watchers watch the 200-day moving average closely for signals of market direction. A close above it would likely be seen as constructive, especially if the higher-than-average $COMP volume seen yesterday can continue. When volume is strong, it can signal more investor conviction.

Rethinking a Pause?  Yesterday we noted that in the wake of a downturn in the December Producer Price Index (PPI) and Retail Sales, at least some analysts were thinking the Fed might decide to pause its rate hikes when it meets in March. Then came Thursday’s Q4 GDP, initial weekly jobless claims, and New Home Sales, a fearsome threesome suggesting the economy continues to run extra hot despite the 450 basis points of extra borrowing costs the Fed has laid down over the last year. Suddenly, the idea of a March pause seems less likely. In fact, FedWatch now puts the probability of an additional rate hike in March at 85%, up from 78% earlier this week. The odds are just 14% for a pause then.

Notable calendar items

Jan. 30: Expected earnings from GE HealthCare (GEHC) and Philips (PHG)

Jan. 31: Start of FOMC meeting, January Chicago PMI, December Consumer Confidence, and expected earnings from ExxonMobil (XOM), General Motors (GM), Pfizer (PFE), McDonald’s (MCD), Caterpillar (CAT), and UPS (UPS)

Feb. 1: FOMC rate decision, December Construction Spending, January ISM Manufacturing, and expected earnings from Altria (MO), Meta (META), Peloton (PTON), and Waste Management (WM)

Feb. 2: December Factory Orders and expected earnings from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL)

Feb. 3: January Nonfarm Payrolls and expected earnings from Sanofi (SNY) and Cigna (CI)

Feb. 6: Expected earnings from Cummins (CMI) and Tyson Foods (TSN)

Feb. 7: December Trade Balance and Consumer Credit and expected earnings from BP (BP), Centene (CNC), and Hertz (HTZ)

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

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