Markets Sink On Big Home Depot Miss, Biden's Return To Debt Ceiling Talks

(Tuesday market open) The first big-box retailer to report results this earnings season came in with a big miss.

Shares of Home Depot HD, a Dow component, fell sharply in premarket trading after the Atlanta-based home improvement chain reported a 4.2% drop in first-quarter revenue, exceeding expectations for a decline closer to 1.5%. The company’s CEO indicated industry conditions have weakened since last year, a worrisome sign given Home Depot’s status as an economic bellwether.
The Home Depot miss, combined with a mixed April Retail Sales report just released by the Commerce Department, have U.S. stocks poised for a softer open, with futures based on the S&P 500® and other indexes down slightly in overnight trading. The market’s firm start to the week looks to be short-lived, especially with the prospect of a U.S. debt default still looming and debt ceiling negotiations in Washington, D.C., yet to generate a resolution.

Morning rush

• The 10-year Treasury note yield (TNX) was down about 2 basis points at 3.487%.

• The U.S. Dollar Index ($DXY) was down 0.07 at 102.364.

• The Cboe Volatility Index® (VIX) was up 0.39 at 17.51.

• WTI Crude Oil (/CL) was down 2 cents at $71.09 per barrel.

Just In

Early Tuesday, the Commerce Department reported U.S. Retail Sales in April rose 0.4% overall from March, short of expectations for an increase of about 0.7%, based on a Briefing.com consensus figure.

April marked the second month in a row retail sales came in on the light side, and follows other recent numbers that have fueled concerns the U.S. is near recession, or may be in one already. Those numbers include the University of Michigan’s Consumer Sentiment index last week, which dropped to a six-month low. Consumer spending accounts for about 70% of U.S. economic output.

Stocks in Spotlight

Home Depot disappoints: HD shares are expected to be under pressure after the home improvement chain’s quarterly revenue dropped more than Wall Street expected. The  company reported net earnings per share (EPS) of $3.82, down from $4.09 during the same quarter a year earlier but about 1 cent above expectations. However, revenue fell 4.2% to $37.3 billion, well under forecasts for a decline closer to 1.5%. The company said it expected full-year sales to decline 2% to 5% from 2022.

Home Depot CEO Ted Becker cited falling lumber prices and unfavorable weather in the U.S. West as two reasons for the revenue slump, but also suggested that business conditions across the industry had eroded since last year. “We expected that fiscal 2023 would be a year of moderation for the home improvement market,” Decker said in a statement. “We also observed more broad-based pressure across the business compared to when we reported fourth quarter results a few months ago.”

Shares of Home Depot, a Dow component, were already down about 9% this year, while the S&P Retail Select Industry Index ($SPSIRE) is up slightly, suggesting recession concerns may have investors tempering their expectations for the housing and building sector. In its previous quarterly report, Home Depot forecast flat comparable sales growth for fiscal 2023 and a diluted EPS decline in the mid-single digits.

Another U.S.-based retailer, the Container Store (TCS), is expected to report results after Tuesday’s market close. Other retailers expected to report this week include Target (TGT) and Walmart (WMT) on Wednesday and Thursday mornings, respectively. Foot Locker (FL) reports Friday, and Kohl’s Corp. (KSS) is scheduled to report May 24.

Rising prices pressured big retailers in late 2022 and many provided conservative profit guidance earlier this year, with executives expressing concern over consumer sentiment amid high inflation. As retailers report earnings, investors might be wise to listen during company conference calls for any CEO comments on discretionary spending versus staples.

Earnings season otherwise slows this week, with slightly more than 550 companies expected to report results, according to Nasdaq.

Eye on the Fed

The probability of a June rate pause is currently near 85%, according to the CME FedWatch Tool. The tool also prices in about a 66% chance the Federal Reserve will lower rates in September and a near-100% chance by the end of this year.

Atlanta Fed president Raphael Bostic on Monday started a busy week for public commentary from central bank officials by telling CNBC he doesn’t expect any interest rate cuts at least through 2023, even if the economy slips into recession. “For me, inflation is job No. 1. We’ve got to get back to our target,” Bostic said.

At least 10 officials with the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, are speaking publicly this week, including Fed Chair Jay Powell on Friday, notes Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.

“We’ll be watching Powell’s comments closely for clues about the likelihood of additional rate hikes,” Collin says. The FOMC’s statement following its meeting earlier this month “stopped short of making a pause in rate hikes explicit,” while some officials are suggesting more hikes are needed. Many market professionals see a “pause” in the Fed’s tightening cycle coming soon, possibly in June, after the central bank hiked its benchmark rate 10 times since March 2022—the fastest pace in four decades.

How might the markets respond if indeed the much-anticipated pause happens? There’s been an “extraordinary wide range of outcomes” for the S&P 500® in the years following the conclusion of Fed tightening cycles over the past century, says Liz Ann Sonders, Schwab’s Chief Investment Strategist.

What to Watch

Investors will want to closely follow news out of Washington, D.C., with President Biden meeting with House Speaker Kevin McCarthy and other top congressional leaders this afternoon to discuss the debt ceiling.

The U.S. has never defaulted on its debt. There’s a first time for everything, but recent market signals, including the Cboe Volatility Index® (VIX) hovering near 18-month lows, suggest the market ultimately expects a resolution. Treasury Secretary Janet Yellen last week said a default would be “catastrophic,” but over the weekend expressed hope that an agreement would happen.

“Debt-ceiling negotiations are picking up momentum, but timing of any default remains hard to pinpoint,” says Michael Townsend, Schwab’s managing director of legislative and regulatory affairs. “June 1 is still the potential default date, but it could be pushed back. An agreement that includes a claw back of unspent COVID-19 funds, reforms the energy permitting process and includes an agreement to cut federal spending in the upcoming budget process is an emerging framework. But agreeing to the specifics and then getting the deal through both the House and Senate is still a huge lift.”

In other economic news Tuesday, the Fed is expected to report Industrial Production and Capacity Utilization numbers for April at 10:15 a.m. ET. Industrial production is expected to be unchanged in April after rising 0.4% in March, according to Briefing.com. Capacity utilization is expected to come in around 79.8%, unchanged from March.

Thinking cap

Ideas to mull as you trade or invest

Higher earnings getting hit: Bank of America (BAC)’s latest Consumer Checkpoint survey notes that the number of higher-income households receiving unemployment benefits rose 40% year over year in April. That could be one factor behind a 1.2% drop in overall card spending per household, the first negative year-over-year reading since February 2021. Bank of America added that even though the labor market remains resilient overall, “higher-income households (over $125,000/year) saw after-tax wages and income contract for the second month in a row (-1.3% YoY).” That said, savings levels seem to be “elevated” across all income groups with median balances “40-70%+ higher than the pre-pandemic average.”

Downshift for electric vehicle market? JD Power reported last week that 21% of new vehicle shoppers said they were “very unlikely” to consider an electric vehicle (EV) for their next vehicle purchase, up from 17.8% in January. USA Today reported that the number of customers “very likely” to consider an EV was 26.9% in March, largely flat for the first three months of the year. Shares of EV companies have already been under pressure amid slower sales and price cuts, with Tesla (TSLA) down about 60% from its 2022 peak above $414.

Bears growling in lithium market: Prices for lithium, a critical component in electric vehicle batteries, have fallen this year with other key commodities, and production is consolidating. Last week, lithium producers Livent (LTHM) and Allkem (AKE) agreed to a merger that will create a global mining company worth $10.6 billion, according to the Wall Street Journal. U.S.-based LTHM will own around 44% of the combined firm (Australia-based AKE will own the rest), and the partners intend to speed up lithium production as global EV manufacturing accelerates.

Calendar

May 17: April Housing Starts and Building Permits, and expected earnings from Target (TGT).

May 18: April Existing Home Sales and Leading Economic Indicators, and expected earnings from Walmart (WMT).

May 19: Expected earnings from Deere (DE) and Foot Locker (FL).

May 22: No major earnings or data expected.

May 23: April New Home Sales and expected earnings from AutoZone (AZO), and Dick’s Sporting Goods (DKS).

 

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

 

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