Deere in Headlights: Miss on Earnings, China Trade Talks Take Center Stage

Deere earnings, along with U.S. and China trade talks, are among the items in focus as the week draws to a close. Oil prices and Treasury yields remain in the spotlight, as well.

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(Friday Market Open) The market has been tough on companies that didn’t quite meet expectations this earnings season, and Friday provided further examples. It’s not necessarily that firms aren’t doing well, but the bar has been raised and if you’re a company that doesn’t climb over that bar, you’re likely to get punched.

Deere (DE) on Friday became the latest big name to run into that particular buzz saw, missing Wall Street analysts’ average projection for earnings per share with a tally of $3.14 and seeing its shares fall in pre-market futures trading before jumping higher once the market actually opened. Analysts had expected $3.33, according to third-party consensus estimates. In a way, however, DE was a victim of high expectations, because its earnings were up a lot year-over-year but down vs. the Street’s consensus.

DE said in its release that the company is experiencing higher raw material and freight costs. This could point to the impact of rising energy prices on big industrial firms, and is something to keep in mind when the next earnings season rolls around in July. What DE didn’t say also stood out after its competitor Caterpillar (CAT) earlier this earnings season said the Q1 represented a “high water mark.” DE didn’t repeat that sort of language in its release, and had a lot of nice things to say about a quarter that saw equipment net sales rise 34% based on what DE called “strength in key markets.”

DE was the second company to disappoint the Street since yesterday’s closing bell. Retailer Nordstrom (JWN) beat Wall Street analysts’ earnings per share estimates and raised guidance, but missed on same-store sales. That key metric barely rose (up 0.2%), and shares of JWN tumbled more than 6% in pre-market futures trading. The same-store weakness for JWN came after a bunch of other retailers reported growth in that area.

Campbell Soup (CPB) was also in the news today as its CEO abruptly stepped down. Shares fell in pre-market futures trading.

Brief Case of China Trade Hiccups

International trade remains a touchpoint, and there was a little hiccup in the S&P 500 Index (SPX) at midday Thursday after President Trump told the media he doubts trade talks with China will succeed. Volatility got a slight bump after his comments while the SPX took a bit of a dip. However, the shakiness didn’t last long and soon the Cboe volatility index, or VIX—which had jumped to around 13.8 after Trump’s comments from under 13 earlier in the day—settled down and finished back around 13.4. The SPX also calmed down and registered just slight losses for the day. The takeaway here is that people didn’t show signs of panic despite the bearish trade remarks.

As we’ve seen over the last year, President Trump’s style is to make big statements that get noticed. Still, any one statement isn’t something investors—especially long-term investors—necessarily need to be too concerned about. If you’re in the market for the long term, it’s important to learn how to ignore the noise. That’s what investors seem to be doing more and more often. Meanwhile, trade talks continue between the U.S. and China, and could remain a market trigger next week. 

For people wondering if the current 2017-type of less turbulent market action can continue, the next week might be one worth watching. It’s around this time in the quarter when big firms sometimes make decisions on how to hedge volatility for the summer months. A lot of firms apparently had hedged volatility into June, judging from anecdotal evidence. The question is whether they’re going to keep that protection for the summer if they sense the possibility of market turbulence, or if they’ll decide to roll it off until September. There’s a seasonality component to volatility, and the VIX options market heading into Memorial Day weekend is where people might start getting an indication of the big firms’ next moves. 

Small Fry Come Up Big

From a sector perspective, the small-caps continued to enjoy a nice move as the week continued. The Russell 2000 Index (RUT) hit new all-time highs Wednesday and built on those gains Thursday as domestic stocks seemed to get more attention from some investors. As we noted yesterday, the small caps tend to have a higher percentage of their business here in the U.S., so perhaps some people see them as less exposed than big multinational companies to possible pressure from international trading tensions. They also might have more protection from a stronger dollar that can make U.S. products more expensive to foreign buyers.

Energy stocks have continued to push higher, and that sector was the one really stand-out performer Thursday. The main impetus is oil prices at the highest levels since 2014, but digging in a bit deeper we’re seeing refiners and smaller U.S. drilling companies outperforming some of the multinationals. Over the last month, the energy sector has easily outpaced the SPX, and it’s the leading sector performer over that time period. Info tech, which fell Thursday, is second on the leaderboard since a month ago while more “defensive” sectors like consumer staples, utilities, and telecom have taken it on the chin.

The weakness in staples and other defensive sectors is likely due in part to the continued rise in Treasury yields, which hit 3.1% for the benchmark 10-year early Thursday and stayed near that level most of the day before retreating to just under it by Friday morning. Two-year Treasury note yields reached their highest levels since August 2008, as shorter-term rates tend to be more sensitive than longer-term ones to a Fed rate hike cycle. Rising yields can sometimes start to make bonds look more appealing to some investors, something we haven’t really seen in a few years. That might be one reason the stock market hasn’t gained much traction.

Info tech came under pressure Thursday after shares of Cisco (CSCO) dropped nearly 4% following its earnings release. CSCO’s results beat Wall Street analysts’ estimates and the company issued guidance that also appeared in line with analysts’ expectations, but there apparently was some disappointment that growth and guidance wasn't stronger given the favorable IT spending environment, according to Briefing.com. Meanwhile, Wal-Mart (WMT) shares fell despite beating Wall Street analysts’ earnings and revenue expectations. The focus after Thursday’s open appeared to switch to same-store sales, which came in just a tick below where the Street had expected.

Data on Thursday reinforced impressions of strong U.S. economic growth. The Philadelphia Fed Survey for May and the Conference Board’s Leading Economic Index for April both gained ground from the previous month.

By the way, if you’re in the Houston area tomorrow, come see TD Ameritrade’s Market Drive at the Hyatt Regency Houston. Registration opens at 8 a.m. CT.

VIX

FIGURE 1: EASING OFF THE VOLATILITY PEDAL.

Though volatility hasn’t declined all the way back to its January lows, it’s recently traded in the low-to-mid teens, as this year-to-date VIX chart shows. This week it rallied twice only to quickly give up gains. Arguably, this indicates the possibility that some investors—many of whom were hurt last year by holding long positions in VIX—are prepared to quickly bail at the slightest sign of a turndown in volatility. Data source: Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Gold Loses Some Luster: Gold is often considered a “safe haven,”where some investors go when they think the sky might start falling. If gold is a measure of market fear, then its performance lately doesn’t hint at much. The yellow metal fell this week to its lowest levels of the year, well below $1,300 an ounce, despite fresh global tensions centered on Iran and North Korea. One possibility is that gold took a hit from the rising dollar, which drew power recently in part from a rise in U.S. Treasury yields. Rising yields and strength in the greenback can often signal boom times for the world’s largest economy and less demand for gold from worried investors. Another aspect of gold’s recent decline could be more technical in nature, analysts said, pointing out that gold recently fell below its March lows. That might have caused some investors to bail. However, Reuters reported that some analysts believe the tense geopolitical situation could keep gold from sliding much further.

Waiting for Tax Cut Impact: With earnings season nearly done and some investors wondering where the next catalyst might be, maybe it makes sense to look backward at tax cuts passed by Congress late last year. Why? Because the full effect of those cuts hasn’t necessarily been fully absorbed by many companies. That means later this year, when some investors expect earnings growth to ease from the massive gains of Q1, many firms might actually get a boost as the impact of the tax cuts starts to work its way through their businesses. We’re probably talking about six months out, and as tax cuts get factored in, we might see an uptick then in capital spending and stock buybacks. There’s no way to perfectly forecast the future, but it’s something to think about if people start expressing pessimism about corporate growth later this year. 

Baby Bust and the Market: If you’re an investor looking to the really long-term, there’s some news this week that might seem a bit alarming. The number of births in the U.S. last year fell 2% from the year before to the lowest level in 30 years, the National Center for Health Statistics reported. Births are down three years in a row, and the birth rate is at a record low. From a stock market perspective, that potentially means fewer kids shopping for clothes and phones about 10 years from now, and perhaps more burden on fewer people to support the country’s aging population. A prolonged decline in births, should it occur, could ultimately reduce demand for key commodities like oil, metals, and gas in decades to come. Nearer term, consider watching the consumer staples sector for any impact: A couple of major companies in consumer staples see billions of sales in diapers and diaper products each year. Those include adult diapers, too, however.

Good Trading,
JJ
@TDAJJKinahan

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Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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