The long rally could be at risk as Walmart and Cisco both expressed caution in their guidance. Shares of both companies lost ground ahead of the open, and the weakness appeared to spread to the major indexes. Treasury yields, however, remain near the bottom of their range.
Pressure hits market early as investors react to cautious outlooks from Walmart and Cisco
Volatility stays near seven-week lows as government shutdown off the table for now
Weekly jobless claims come in above expectations, reach highest level since mid-August
(Thursday market open) With inflation data in the rearview mirror and a government shutdown averted for the moment, investors are focusing on earnings this morning—and it’s a decidedly mixed picture.
Target (TGT) shares skyrocketed yesterday on its quarterly numbers, but Walmart (WMT) and Cisco (CSCO) fell sharply in premarket trading after opening their books, helping drag major indexes into the red. Both companies enjoyed solid quarters but disappointed with their guidance (see more below).
Several Federal Reserve speakers are on today’s calendar as the futures market now builds in zero chance of a rate hike in either December or January, and a small but growing chance of a rate cut by March. This isn’t surprising given the mild inflation data over the past couple of days.
Retail and financial shares were among Wednesday’s strongest performers as stocks posted another winning day on signs of easing inflation. The KBW Regional Banking Index (KRX) rose 1.3% to a two-and-a-half-month high. Transportation and consumer staples were also higher.
Initial Weekly Jobless Claims climbed to 231,000 in the latest data reported Thursday—the highest since mid-August and well above the Briefing.com consensus of 220,000. It was also up from 218,000 a week earlier. The four-week moving average of Jobless Claims rose 7,750 to 220,250, still relatively low historically. Any large weekly spikes should be watched for clues as to whether the labor market is slowing.
Guidance gulp: There’s been plenty of good economic and earnings news this week, but Cisco’s quarterly report late Wednesday wasn’t among them. Shares tumbled almost 11% in premarket trading after the digital communications company cut its guidance for the 2024 fiscal year and guided well below Wall Street’s estimates for current-quarter revenue.
“Cisco saw a slowdown of new product orders in the first quarter of fiscal 2024 and believes the primary reason is that customers are currently focused on installing and implementing products … following exceptionally strong product delivery over the past three quarters,” the company said.
Weakness at Cisco could indicate weakness beyond the company itself because the components it makes, including switches and routers, are used in so much global network infrastructure. Cisco also offers cloud and artificial intelligence (AI) products. Its decision to trim growth estimates could imply falling demand for technology in general. On the plus side, Cisco’s fiscal Q1 earnings and revenue beat analysts’ estimates.
Walmart, much like Cisco, slightly surpassed analysts’ quarterly estimates but rolled out fiscal 2024 guidance below consensus views on Wall Street. Shares fell 6% ahead of the open despite the company’s nearly 5% annual gain in comparable store sales and a 24% jump in ecommerce. In an interview on CNBC, Walmart’s Chief Financial Officer John David Rainey said consumers are watching their spending and looking for deals. “In the last couple of weeks of October, there were certainly some trends in the business that made us pause and kind of rethink the health of the consumer,” Rainey said.
The earnings treadmill slows a little tomorrow but picks up early next week in a big way, especially on Tuesday when chipmaker Nvidia (NVDA) leads a host of reporting companies. Deere (DE) earnings straggle in next Wednesday just before the holiday. With Nvidia, the outlook again becomes front and center after the company enjoyed an impressive 2023 and investors wonder what’s next for 2024.
Shutdown averted: Congress avoided a government shutdown for the second time this fall, but in doing so significantly increased the risk of a shutdown in early 2024, says Michael Townsend, managing director of legislative and regulatory affairs at Schwab. While legislation passed by Congress takes the shutdown drama off the table until after the holidays, it creates two shutdown deadlines in early 2024. The House and Senate will work between now and then to pass the remainder of the appropriations bills, but then lawmakers will have to reconcile the huge differences between the two versions.
“Given that House Republicans are pushing for spending cuts that Democrats in the Senate have no interest in, those negotiations will be extremely challenging,” Townsend says. “As a result, the risk of a shutdown around the January and February deadlines is high.”
Start ’em up: October Housing Starts and Building Permits bow just before the open Friday as mortgages finally dip (see more below). Analysts expect a slight monthly rise in starts to a seasonally adjusted annual rate of 1.365 million units, says Briefing.com. They forecast a slight monthly drop in permits to 1.445 million. Permits declined in September, but that reflected softness in multifamily units. Single-unit starts and permits both rose that month, and supplies remain tight. Starts often reflect builder commitment, as they don’t usually break ground unless they’re confident they can sell a home.
Sector sampling: Rate-sensitive real estate remains in the sector pole position over the last week as retreating Treasury yields provided a tailwind. However, materials, info tech, industrials, consumer discretionary, communication services, and financials aren’t normally considered “defensive” sectors, and all are up more than 3% the last five sessions to outpace the S&P 500® Index (SPX).
This arguably reinforces ideas that investors are adopting a “risk-on” stance across a wider patch of the market. Volume was above average Wednesday on the New York Stock Exchange and advancers easily led decliners, both signaling healthier conviction. Ninety-two stocks made 52-week highs yesterday on the NYSE versus just nine making 52-week lows. The SPX closed above 4,500 for the first time since September 1, but faces strong resistance near 4,600.
Early today, futures trading pegged chances at 100% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following the December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are also 100%. The market prices in chances of the Fed cutting rates 25 basis points by its March meeting at 28%.
Bond beat: In case you missed it, here’s the latest insight on the bond market from Kathy Jones, chief fixed income strategist at Schwab. “Given the progress made toward its goals, we agree with the market view that the Fed is unlikely to hike the federal funds rate again in this cycle,” she says. “The market may be a bit too optimistic about the timing and pace of rate cuts in 2024, but we would not rule out some easing by mid-year if current trends continue.”
Ideas to mull as you trade or invest
Punch list: Geopolitics, rising Treasury yields, volatility in the crude oil market, and inflation are among the chief concerns for investors as 2023 winds down. One you can likely cross off your worry list, however, is fixed income taking a hit from “tax-loss” selling. That’s when investors sell losing positions at the end of the year to book losses with an eye on income taxes. It’s been a rough year for fixed income, but chances of a holiday season run for the exits seem low. “There have only been a handful of years when the bond market posted a loss, and a lot of bond holders are ‘buy and hold’ as opposed to actively trading,” says Collin Martin, a director of fixed income trading at the Schwab Center for Financial Research. “So, tax-loss selling in bonds is unlikely to be a driver given the nature of fixed income in a portfolio.” In addition, most tax-loss selling is by individual investors, and those doing it probably make up a small part of the huge bond market.
Home ec: Front doors swing open tomorrow and again next week for housing data, and you can almost smell the fresh paint. That new home scent is courtesy of hopes for lower interest rates next year, which already translate into slightly less onerous mortgage rates. The average 30-year mortgage remains relatively pricey at 7.4%, according to Mortgage News Daily, but down from 8% in late October. While it’s unclear where rates go from here, a prolonged decline could have multiple impacts on housing. First, it might reduce existing home prices if more people who’d been postponing moves put their homes on the market as the premium of new mortgages to existing ones narrows. The wide gap kept many people in their homes longer than they planned, unwilling to trade a low rate for a higher one. Growing availability would likely push existing home prices lower, which helps buyers more than sellers.
This new house: Lower rates could have various implications for new homes, which already enjoy heavy demand. On one hand, a larger group of buyers might keep new home prices elevated and make builders busier, positive news for large homebuilding companies. On the other, a larger supply of existing home availability, typically at a discount to new homes, might hurt new home demand. More existing homes on the market might also help home renovation companies like Home Depot (HD) and Lowe’s, (LOW).
Nov. 17: October Housing Starts and Building Permits.
Nov. 20: October Leading Indicators and expected earnings from Zoom (ZM).
Nov. 21: Expected earnings from Nvidia (NVDA), Dick’s Sporting Goods (DKS), Lowe’s (LOW), Autodesk (ADSK), HP Inc. (HPQ), Medtronic (MDT), Kohl’s (KSS), and October Existing Home Sales.
Nov. 22: October Durable Goods, October Durable Orders, Final November Consumer Sentiment from the University of Michigan, and expected earnings from Deere (DE).
Nov. 23: U.S. markets closed for Thanksgiving holiday.
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