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Market Update

Fed Remains Center Stage Despite Strong Wal-Mart, Cisco Earnings

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May 19, 2016

(Thursday Market Open) After so many brick-and-mortar retailers disappointed with weak first-quarter results, Wal-Mart (WMT) easily surpassed estimates. Still, Fed policy remains front and center early Thursday.

Before the open, WMT reported first-quarter earnings per share of 98 cents, versus $1.03 a year earlier. Revenue came in at $115.9 billion, against the year-earlier figure of $114.83 billion.

Analysts had expected earnings per share of 88 cents on revenue of $113.22 billion, according to Reuters. Shares rose sharply in pre-market action. WMT’s earnings fit into a trend this earnings season for retailers: The discount end seems to be doing well.

Looking more closely at WMT’s results, it appears the company’s grocery segment may have helped shield it from some of the harsh winds suffered by retail competitors. This despite the growth of so-called “deep discount” grocery stores. In a sense, it changes how the market can view WMT. It’s not just a straight discounter, but a discounter with groceries. The quality of WMT’s offerings on groceries has increased significantly.

Wal-Mart wasn’t the only major company posting better than expected earnings. Cisco Systems (CSCO) shares rose in pre-market trade after the company beat estimates and posted strong guidance after Wednesday’s close. CSCO’s business is growing along the cyber-security end. What WMT and CSCO have in common is that they’re changing how investors think about the companies because they’re finding new sources of growth, with groceries in WMT’s case and cyber-security in CSCO’s. That’s usually a good sign of good leadership. 

Despite the bullish tone set by Wal-Mart and Cisco, the market could contend Thursday with further fall-out from Wednesday’s release of Fed meeting minutes, which projected a more hawkish tone and raised expectations for a possible June rate hike. Stocks sold off after the minutes came out. Chicago Mercantile Exchange (CME) Fed-funds futures now predict a 30% chance of a June rate hike, up from 6% a week and a half ago, a really big move. The chances go above 50% for the Fed’s July meeting, despite the fact that there’s no scheduled press conference after that one.

To put things in perspective, though, there’s still only about a one in three chance of a June rate hike, according to the futures market. But looking farther ahead into 2016, there’s now the possibility of two rate increases this year. A week and a half ago there was thought that there might not even be one.

And Wednesday’s meeting minutes weren’t the last investors will hear from the Fed this week. New York Fed President William Dudley and Vice Chairman Stanley Fischer are both scheduled to speak later today. It will be interesting to hear what they have to say regarding the potential for rate increases.

S&P 500

FIGURE 1: KEY SUPPORT AT 2044

The S&P 500 (SPX), plotted through Wednesday on the TD Ameritrade thinkorswim platform, hit an intraday low of 2134.49 on Wednesday, the lowest level for the index since April 7, but closed well above that. Support is now at 2044. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Fed Speaks; Markets Listen: Though sometimes market reaction to events can be hard to interpret, that wasn’t the case after Wednesday’s release of hawkish Fed minutes. Most of the markets reacted just the way that might be expected, with the financial sector rallying, bond yields climbing, the dollar rising, and crude oil and gold falling. The rate-sensitive two-year Treasury yield reached its highest level since mid-March. Various economic talking heads, speaking on television immediately after the release of the minutes, concurred that a June rate hike seems more likely, and some said that might actually bolster stock prices, noting that uncertainty around rate hikes helped contribute to recent choppy trading. Others said there’s still a chance the Fed could demur, especially if volatility increases in June ahead of the scheduled June 23 British referendum on whether to exit the European Union, or “Brexit.” That vote comes the week after the Federal Open Market Committee (FOMC) meeting.

Off Target: Wal-Mart’s strong results Thursday came one day after Target (TGT) fell more than 7% and registered new 52-week lows on disappointing quarterly numbers. Though earnings per share beat estimates, same-store sales weren’t up as much as analysts had forecast, overall sales fell, and second-quarter guidance came in below expectations. Remember though that TGT’s revenues no longer include its pharmacy and clinic business, which it shipped out to CVS late last year. In its earnings press release, the company referred to “an increasingly volatile consumer environment.” That’s certainly been the case for Target and other retailers, judging from quarterly results, as it seems many consumers have switched to online shopping and to more discount outlets. The retail earnings parade isn’t over yet, with Gap (GPS) reporting today.

One Year After All-Time High, What’s Holding Market Back? As noted earlier this week, Friday marks the one-year anniversary of the S&P 500 Index (SPX) posting its all-time intraday high of 2134.72. A year later, the SPX is more than 3% below that level, dragged by weakness in a few key sectors. Looking at performance by sector over the last year, it’s energy that’s weighed the most, down nearly 17% from a year ago as of Wednesday, according to Fidelity Research. The next weakest sector over the last year is Materials, down 11%, followed by Health Care (down 6.3%) and Financials (down 5.7%). What would have been the smartest sector picks last May, in retrospect? Utilities are up 7.6% since then and Telecommunication Services are up 4.4%.

Good Trading,
JJ
@TDAJJKinahan

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