The question for today is whether a strong set of retail earnings overnight and this morning can translate into gains for the broader market, where trade concerns continue to be a burden.
Earnings from Foot Locker, JW Nordstrom and Gap all look impressive
Michigan sentiment due later in the morning
Signs of sluggish pre-holiday trading already in evidence
(Friday Market Open) Retail earnings season just ended with an exclamation point.
Shares of Foot Locker (FL) and JW Nordstrom (JWN) both jumped in pre-market trading, with JWN getting an 8% lift and FL up more than 4% to cap what’s generally been a decent stretch for most of the retailers reporting. There were a few duds along the way, but today’s results definitely could help people forget the laggards.
FL beat analysts’ consensus on earnings per share and reported a huge 5.7% rise in same-store-sales in Q3. Margins also improved. This comes after Nike (NKE) had a nice-looking quarter, so it wasn’t entirely unexpected. FL is a mainstay in many malls, so its solid quarter might imply that at least some shoppers still enjoy heading out to brick-and-mortar stores, especially when it comes to footwear.
Down the aisle at JWN, foot traffic wasn’t really the story. Instead it was a sharp 7% rise in digital sales, which the company says now represent one-third of revenue. JWN also raised its outlook and beat analysts’ earnings projections. This digital strength is good to see because it’s another sign that the company’s growing emphasis on e-sales appears to be working.
Before JWN and FL came to the dance, Gap (GPS) reported better-than-consensus earnings late yesterday and shares rose more than 3%. So it’s a retail trifecta. The question is whether this strength can translate into gains for the broader market.
Outside of the mall today, investors get a look at November University of Michigan sentiment and continue to watch developments on the trade front. Major indices pointed to chances for a slightly higher open after three days of declines.
Thanksgiving is still nearly a week away, but it feels like pre-holiday trading has already started on Wall Street. Without much key data or earnings between now and next Thursday’s national celebration, we may be in store for more of this lackluster action as people start rushing to the exits between now and the middle of next week.
If you’re looking for upside catalysts over that time period, you may be disappointed. Earnings are mostly over, there’s no Fed meeting for a while, and trade headlines keep going back and forth. On the other hand, selling hasn’t been able to pick up much steam either, possibly in part because people don’t want to miss out if a Phase One trade deal suddenly appears more likely. The latest rumors are of talks in Beijing next week, but we shall see.
The 3100 level in the S&P 500 Index (SPX) held pretty well the last two days despite some intraday testing. With interest rates still low, the consumer looking healthy, and a better than expected earnings season in the books, there might be some hesitation to take things too much lower.
With well over 90% of earnings season tallied, S&P 500 earnings are on pace to drop 0.8% in Q3, according to S&P Global Market Intelligence. That sounds kind of unimpressive, but it’s a lot better than the 3% to 4% drop many analysts had anticipated. The firm pegs Q4 earnings to fall 0.7% and 2020 earnings growth at 8.6%.
Stocks mostly fell Thursday, led down by the semiconductor group’s worse than 1% decline. This appeared connected at least partly to some analyst downgrades, including one of Advanced Micro Devices (AMD), a stock that’s been on a roll for most of the year. It’s interesting to see that in most of the downgrades (of AMD and other chip stocks), analysts didn’t move their price targets much lower, so it wasn’t like they necessarily see huge headwinds. The reports seemed to hint instead that these stocks have moved very far, very fast, and some analysts think they might have gotten over their skis a bit.
AMD, for instance, is the best-performing stock in the S&P 500 Index (SPX) so far this year, in part because the company has been growing market share. Semiconductor stocks as a whole were up nearly 50% year-to-date as of mid-week. Those are impressive gains, so it’s not surprising if some profit taking shows up this time of year.
In geopolitical news, another trade plan was in the mix Thursday as CNBC reported that House Democrats and the Trump administration didn’t reach an agreement to move ahead with President Trump’s new North American trade deal during a meeting. This doesn’t mean there’s no chance of passage, so stay tuned. An agreement here might give companies in the automobile, agricultural, and transport sectors a boost.
CHART OF THE DAY: SUMMER BREEZE: Usually volatility (VIX-candlestick) cools off in the hot summer months, and that was no different this year, as this six-month VIX chart shows. Now, after a late summer jump, VIX appears to be back to its summer ways. This despite all the recent trade and political jitters. Though a low VIX is a reflection of volatility expectations over the next month or so, seasoned investors likely know that, as volatility compresses, it can take on a "coiled spring" effect, and can have an outsize jump if and when stocks break out to the downside. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.
Caution Signs Lagging: Stocks are on a three-day losing streak, but the caution indicators mentioned here yesterday continue to look muted. Bonds fell again Thursday, sending the 10-year yield back up to 1.77%. Gold sank, and while volatility did rise a bit as measured by the Cboe Volatility Index (VIX), it remains relatively low—crossing below the 13 handle this morning (see figure 1 above).
VIX might be worth watching a bit more closely in the coming days, because thin, pre-holiday volume can sometimes cause more dramatic moves in the market. Anyone planning to do some trading over the next week should consider doing so cautiously and not going all in or all out at once in case of any big swings.
Trade Perspective: If you feel dizzy watching all the back-and-forth headlines on trade spin by this week, join the club. It seems like every day there’s another development, positive or negative, and the markets remain super sensitive to these pendulum swings. While it’s not necessarily a great idea to keep watching the minute-by-minute stuff, that Dec. 15 deadline for new 15% tariffs on about $160 billion in China imports—including mobile phones and toys—keeps getting closer. If those tariffs take effect, there could be some repercussions on the market and on the U.S. economy.
A couple of thoughts that might help put things in perspective: First, next year is an election year, so it seems like an unlikely scenario where the U.S. would simply give up on making a deal. Another thing to remember is that these headlines we keep seeing about little disagreements are mainly positioning for the two contenders, like a playground fight where there’s a lot of tough talk without things happening one way or the other. If you avoid focusing on these little scuffles in a bigger war, you might be able to stop worrying as much about the day-to-day developments.
Claims Tracking: We’re rapidly approaching the next U.S. monthly employment report, and the latest readings on weekly jobless claims are starting to tick up. Could this mean anything for the Dec. 6 non-farms payroll report? Well, possibly. First, it’s important to keep in mind that new jobless claims the last two weeks of 227,000 each time remain historically low. They’re just a bit higher than people may have gotten used to over the last year or so. As Briefing.com observed Thursday, initial claims have been more elevated than usual in recent weeks, suggesting perhaps that they have reached their cyclical bottom. “Even so, they remain at relatively low levels indicative of an otherwise solid labor market,” Briefing.com said.
From a big-picture view, as recently as last spring new claims topped 220,000, and a year ago they rose briefly to above 240,000. Neither of those times coincided with any surprisingly poor trend in monthly jobs numbers. That said, it’s not prudent to get too laid back about rising weekly claims, either. Job growth has slowed a lot this year, though it remains strong with a three-month average of 176,000. The question is whether new tariffs (if they occur) or slower business spending (which the Fed keeps telling us about) start to pinch employer demand for new workers.
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