Spirit Week: Sentiment Turns Positive After Care Package From China, Wal-Mart

Word of new trade talks with China and solid Wal-Mart earnings seem to have lifted the mood on Wall Street this morning. More retail results due this afternoon.

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Key Takeaways

  • Spirits appeared to turn positive on Wall Street amid word of new planned trade talks with China


  • Wal-Mart easily beats estimates, sending shares up more than 10% in pre-market trading


  • NVIDIA and Nordstrom earnings due later, and Cisco’s earnings also look strong


(Thursday Market Open) After Wednesday’s plunge, investors needed a little something to lift their spirits. They received two care packages early Thursday, one from China and the other from Wal-Mart.

Solid earnings from the world’s biggest retailer and word that a Chinese delegation is set to visit Washington later this month to talk trade might help fade the Turkey-related fears that sank the market earlier in the week. Stocks rose sharply in pre-market trading as good earnings seem to be overshadowing the Turkish situation at least for the moment.

Double-Digit Jump for WMT Shares

WMT easily beat Wall Street analysts’ earnings estimates and reported a 40% rise in online sales during the most recent quarter. The huge retailer’s results might be another indication of a healthy U.S. consumer, and shares leaped more than 10% before the opening bell.

WMT earned $1.29 a share in Q2, beating estimates by 8 cents, and revenue of $128.03 billion also topped forecasts. U.S. same-store sales rose 4.5%, above forecasts for 2.3%. The company also looked very impressive in raising earnings guidance for the full fiscal year to between $4.90 and $5.05, from previous guidance of $4.75 to $5. 

After the disappointing sales results yesterday from Macy’s (M) (see more below), WMT’s earnings could give investors new faith in the retail sector. 

There was other positive news on the earnings front late Wednesday, when Cisco (CSCO) beat Wall Street analysts’ estimates and raised guidance, citing higher revenue from subscriptions in its software and services business. Shares were up more than 6% in pre-market trading. CSCO has put up good results pretty consistently and did so again.

The retail earnings parade marches on after the close today when Nordstrom (JWN) reports. There’s also scheduled to be another signal from the semiconductor industry this afternoon with results from NVIDIA (NVDA). Even though the industry has been on a tear these past few years, some analysts and investors are starting to question whether or not high growth rates can be maintained going forward. Perhaps NVDA’s fresh results can shed additional light.

“Sell-Off?” No, Buyers Just Seemed to Stay Home

It’s easy to glance at the recent market action—with stocks dropping Wednesday for the fifth time in the last six days—and call it a “sell-off.” That isn’t necessarily accurate, however. Instead, what we might be witnessing is a retreat from buyers. 

Though some of the traditional “defensive” market areas like Treasury notes and volatility are on the rise amid trade war, tariff and currency concerns, gold continues to track lower. This could mean the recent stock market action is less about aggressive selling and possibly more about a lack of buying. This isn’t too surprising, if you step back. Wall Street is just below all-time highs, and it looks like some investors might be waiting for things to level off before they get back in. 

As for Turkey, it’s not as if the situation has gone away just because it retreated into the background this morning. It’s probably going to be like the European bank crisis we saw a few years ago. At first it’s an everyday headline, then every week, then every month. But it doesn’t necessarily vanish. Turkey is one of several places in the world where economic concern could rear its head at any time. 

Staples Find a Bid

Some of the more “defensive” regions of the stock market like consumer staples and telecom generated interest Wednesday. One reason for staples doing better might be signs of improved pricing power for some companies in the industry. Look at Kimberly Clark (KMB), for instance. On Wednesday it announced it’s raising prices for two popular consumer products—Huggies and Kleenex—by the mid-to-high single-digits. Earlier this quarter, on its earnings call, Clorox (CLX) announced price increases for a few of its consumer products, and this week announced positive trial results for a sensitive skin product from its Burt’s Bees subsidiary.

New products and pricing power can often be a formula for success, and shares of both CLX and KMB rose sharply Wednesday. They’ve both talked about increasing prices and they’re leading the way in a down market.

Another shiny spot on the consumer side is the restaurant industry, which seems to be rolling right along. Shares of Darden Restaurants (DRI)—owner of Olive Garden and other chains—nearly hit a 52-week high Wednesday. Improved restaurant sales played a large part in July’s 0.5% rise in U.S. retail sales reported Wednesday. Healthy consumers often mean more people going out to eat, something you probably don’t need an economics degree to understand. 

One more possible ray of sunshine despite recent losses is that the major indices mostly clawed back at the end of the day Wednesday to finish well off their lows. The S&P 500 Index (SPX) fell 0.76%, but once again bounced after nearing psychological support near the 2800 level. Some analysts have said a drop below that might generate additional selling pressure, but we’ll have to wait and see if that happens.

On a negative note, July housing starts and building permits released early Thursday both came in below analysts’ estimates.

The slumping crude market advanced a bit early Thursday but remains near two-month lows (See Figure 1 below). U.S. crude inventories rose 6.8 million barrels in the week leading up to Aug. 10, compared with analysts’ expectations for a decrease of 2.5 million barrels, Reuters reported, citing government data. Normally, this is a time of year when crude supplies tend to decline amid heavy use.

FIGURE 1: Leaking Fuel? U.S. crude oil futures (/CL) are wilting in the summer heat, dipping toward their lowest levels since late June. As this chart shows, they’re also coming within range of the 200-day moving average (purple line). Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Return Policy: Macy’s (M) earnings yesterday and the market’s response arguably could serve as another example of how some investors want more than results that simply “beat” Wall Street. Yes, M’s earnings and revenue did surpass the average analyst expectation, and the stock initially inched up in pre-market trading. However, by the time the market opened for the day’s session, the stock was off 5%, and by day’s end it was down nearly 16%. Why? Well, it seems some investors were unhappy that M once again had sales fall year-over-year.

This could be a good lesson for long-term investors out there. With the market still near all-time highs and earnings growing more than 20% on average for S&P 500 companies in Q2, many investors seem to have a “what have you done for me lately?” approach, and might be ready to punish a company’s stock for stuff that shows up deeper down in an earnings report. That happened a lot earlier this year and it hasn’t gone away. Looking specifically at M, we saw a company with falling year-over-year sales and lower margins in an environment where the average consumer appears to be quite healthy. That might be making some investors ask what’s going on.

Tariff Impact? Depending on the ultimate size of the U.S. tariffs against China, there could be small price increases for U.S. consumers, a negative impact on U.S. corporate profits, and a drop in China’s GDP, the CME Group said in a research paper this week. It calculated that a 25% tariff on $200 billion of Chinese goods could cause U.S. corporate profits to fall by 1.25% to 1.5%, assuming impacts of the trade dispute were fully absorbed by lower profit margins. However, some of the costs would likely be passed along to consumers. “Under a worst-case scenario that a 25% tariff is applied to all Chinese goods, one could see a 0.3% rise in U.S. CPI (consumer price index), a similar fall in corporate profits as a percentage of GDP (so about a 3.3% drop in overall corporate profits) and a 0.8% hit to Chinese GDP,” the report noted. “On the other hand, if one sticks to the Administration’s original proposal of 10% tariffs on $34 billion of goods, then the impact of the trade dispute is negligible.”

$64 Question? U.S. crude oil futures are now down more than $10 from highs in the mid-$70s a barrel back in the late spring. Prices spent part of Wednesday below $65 a barrel. Which sets up an interesting technical picture. The front-month U.S. crude contract hasn’t been below $64 a barrel since early April, and has tested that mark a couple times since and bounced off (see Figure 1 above). Sometimes, though not always, a dive below such a support level can bring additional selling as longs abandon their positions. Another point to consider: The crude contract came within a hair of its 200-day moving average of around Wednesday, a level now near $65 and seen by some as a key technical point. Trade war fears, slumping stock markets, and a strong dollar have all helped combine to gang up on oil lately. 


Good Trading, 

JJ

@TDAJJKinahan 

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