Headlights on Deere, Retail Earnings: Higher Costs Compete With Strong Demand

Deere and Nordstrom earnings are in focus today after yesterday’s sharp rally. There still seems to be some caution in the market despite Thursday’s gains.

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Key Takeaways

  • Deere earnings in spotlight as the company reports impressive demand, cost pressures


  • Nordstrom earnings late Thursday carried along what’s been a strong retail earnings season

  • There still seems to be a bit of caution in the market, with volatility elevated.

(Friday Market Open) What a difference a day makes. After a weak early start to the week, equities regained their mojo Thursday, with all 11 sectors solidly in the green. As Friday began, focus turned toward fresh earnings data and mixed markets overseas.

Deere (DE) was in the headlights early Friday after the company reported mixed results, coming in higher than Wall Street analysts had expected on revenue but missing earnings estimates. It was especially interesting to look past the headline numbers, because some of the trends affecting DE might reflect broader economic patterns worth watching.

For instance, DE talked about the high cost of raw materials and employees, with trucking expenses in focus. The company appears to be getting squeezed in these areas. They’re operating in a tough environment, but demand for their products is definitely there, as revenue data showed. DE shares fell 2% in pre-market trading.

Speaking of demand, Nordstrom (JWN) seems to be benefitting from it. The stock was up nearly 9% in pre-market trading after reporting excellent results highlighted by a big increase in online sales and same-store sales that grew 4%, up from analysts’ predictions for less than 1%.  If the stock opens where it was trading in pre-market, it would be at one-and-a-half-year highs.

Retail earnings are going very well overall, as even Macy’s (M) beat on top- and bottom-lines before its stock got hit by concerns about factors like weak margins. In addition, today’s earnings from DE seem to show that there’s demand everywhere. What’s a bit concerning, though,  is the higher costs many companies face.

As for Friday’s market, it looks like there might be some mixed trading after Thursday’s huge rally as everyone catches their collective breath. It’s possible there could be some selling pressure into the weekend, but we’ll have to wait and see.

Thursday Thrills

On a percentage basis, the Dow Jones Industrial Average ($DJI) led the pack Thursday, helped along by a strong showing from Walmart (WMT), which rose about 10% on solid earnings. One notable number in the WMT earnings report was same-store sales, which grew at the fastest pace in 10 years on a strong showing in grocery and seasonal merchandise. 

Also helping the blue chips were Cisco (CSCO), which got a boost from strong earnings and a positive outlook, as well as Boeing (BA) and Caterpillar (CAT), two multinationals that rallied on word that the U.S. and China are headed back to the trade negotiation table. 

The post-market news wasn’t as bright over in tech, however, as Nvidia (NVDA) shares fell nearly 3% in pre-market trading despite beating analysts estimates. It looks like guidance might have disappointed some investors, coming in under expectations.

Risks Still Elevated

The Thursday rally was truly across-the-board, and even spilled over into traditionally defensive sectors such as telecom, which rose 2%. This may be a sign that, amid the froth, some investors are hedging their risk as they watch the swarm of geopolitical tension hanging over the market. 

Speaking of risk, the Cboe Volatility Index (VIX) remains elevated even after the Thursday rally (see Figure 1 below). It fell about 5% early Friday but remains above 13. There was no real flight to the bond market earlier in the week, nor was there a massive selloff in bonds yesterday. And that other historical bastion of perceived safety— gold—has stayed below $1200, near its 2018 low.

The takeaway here is that it’s important to watch not just the stock market, but its relationship to other markets. For example, prior to the February 2018 market meltdown, the VIX was showing a bit of jumpy behavior, rallying even during rallies in the stock market. Though past performance doesn’t guarantee future results, often the mark of a true risk-off shift is the interplay of these relationships between stocks, bonds, gold and volatility.  

Earnings season is winding to a close, and soon it’s back-to-school and back-to-work. With this fall’s midterm elections and one, perhaps two, interest rate hikes forthcoming (see below), we may see more of this up-down-up-down activity. 

An Eye on Housing

There’s been a basketful of positive economic data lately, but little of it from the housing sector. The woes in housing continued Thursday when both housing starts and building permits for July came in below Wall Street analysts’ estimates. This came after weekly mortgage applications fell 2% in the latest reading, despite average mortgage rates slipping slightly. 

Going back to the starts and permits, the weak data might partly reflect builders having to pay up for materials and labor. Perhaps investors might want to consider listening to Toll Brothers (TOL), one of the big home builders, to hear any observations the company might have when it reports earnings next Tuesday. During TOL’s last earnings call, back in May, the company said it acknowledges “the challenges associated with labor and material cost inflation.”

FIGURE 1: RETRACEMENT OF FEAR...BUT NOT ALL OF IT. Though Thursday’s broad-based rally brought the Cboe Volatility Index (VIX) well off Wednesday’s high, the fear gauge remains elevated relative to last week’s low. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

One Lump or Two? Amid this week’s turmoil, interest rates have been relatively calm—no spike on fear and no selloff as fears subside. And what about the Fed? It has 3 meetings left in the 2018 calendar, and Fed funds futures have priced one, and likely two 25-basis point hikes. According to the CME FedWatch tool, odds of a September hike stand at 96%. Odds of a subsequent hike at its December meeting stand at 69.4%. Meanwhile, the 10-year Treasury remains stubbornly below 3% at 2.87%. For reference, two more hikes in 2018 would put the Fed funds rate at 2.25%-2.5%. 

Earnings Continue to Impress: World events and market hiccups aside, there really hasn’t been much change in corporate fundamentals, at least judging from S&P 500 earnings results. With the season nearly complete after this week, research firm CFRA forecasts average earnings per share gains of 24.8%. The firm expects earnings growth in Q3 to hit 22% and in Q4 to reach 19.1%, with full-year growth of 22.2%. Strong earnings this week from Wal-Mart (WMT) and Cisco (CSCO) continued the string of mostly solid Q2 results.

While only time will tell if predictions for Q3 and beyond come true, this year’s bountiful earnings crop could raise questions about possible tough comparisons for many companies in 2019. CFRA sees average S&P earnings rising just 10% next year. However, that’s better than some analysts had been thinking going into 2018, when talk of “peak earnings” was common.

Labor Costs Under Control? We haven’t talked about the Fed much in recent days, but a piece of data issued Wednesday might have some bearing. Preliminary unit labor costs declined 0.9% during Q2, below Briefing.com’s consensus for an increase of 0.5%. The key takeaway from the report is that labor costs look to be in check, which likely could facilitate a gradual tightening path for the Fed, Briefing.com noted. As of Thursday, CME Fed funds futures put chances of a rate hike by the September meeting up in the stratosphere at 98.4%. That’s up from around 90% earlier in the week when Turkey’s debt concerns were front and center. 


Good Trading, 

JJ

@TDAJJKinahan 

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Economic Calendar for this week. Source: Briefing.com
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