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Wal-Mart Greeters Stayed Busy in Q2 But Forecast Less Rosy; Fed Minutes Digested

August 17, 2017

(Thursday Market Open) Shoppers flocked to the nation’s biggest retailer last quarter, but it might not be enough to satisfy the market. Retail remains front and center today even as investors continue digesting yesterday’s Fed minutes and look ahead to additional earnings this afternoon.

If there’s one thing investors have seen a lot of this earnings season, it’s that beating analysts’ earnings and revenue expectations doesn’t often get rewarded if a company’s forecast looks less than pleasing. Wal-Mart (WMT) might be the latest company to fall victim, as the company’s shares dropped nearly 2% in pre-market trading after WMT projected Q3 earnings per share that were below Wall Street’s estimates. WMT is a component of the Dow Jones Industrial Average ($DJI), so if it struggles, that could weigh on the index.

WMT’s Q2 revenue and earnings topped analysts’ estimates, but earnings declined from a year earlier. The company reported adjusted earnings of $1.08 a share while revenue climbed 2.1% to $123.4 billion and same-store sales rose nearly 2%. On a positive note, WMT saw online sales rise 60% during the quarter, a sign it’s continuing to draw customers to its electronic portal in big numbers.

As retail earnings continue, investors seem to be trying to figure out who the winners and losers are going to be in the fight between brick-and-mortar and online retailers. With Wal-Mart (WMT) and Alibaba (BABA) reporting this morning and Gap (GPS) this afternoon, the question remains open. However, the sector made solid gains Wednesday in light of Target’s (TGT) earnings results exceeding analysts’ estimates. BABA delivered a strong quarter as well, beating analysts’ estimates on the top and bottom lines.

Stocks pulled back from solid early gains Wednesday to close slightly higher as concerns mounted about progress on Capitol Hill. It appears most investors have already begun to dismiss the idea of tax cuts this year, and the markets are relatively sanguine about that. But if there’s no progress on taxes in 2018, it could mean stocks eventually might face some sort of reckoning.

Materials led all sectors Wednesday, while energy crumbled as oil prices sagged. The sector to watch today could be consumer discretionary as investors digest all the retail earnings coming across the wire.

Fed minutes from the July meeting got a dovish read from investors, at least judging by action in CME Group Fed futures. Chances of a rate hike by the end of the year fell to just above 42% soon after the minutes appeared Wednesday afternoon, down from nearly 50% earlier this week.

The crux of the matter might center on the Fed’s inflation views. The minutes showed the Fed still expecting inflation to hit its 2% target by next year, but “many” participants at the meeting “saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside,” the minutes noted. “Participants agreed that a fall in longer-term inflation expectations would be undesirable.”

With concern about light inflation still on the table, Fed officials seem caught between trying not to slow down the economy by removing stimulus, while at the same time cautious about greasing the skids too much. Rather than giving much more detail on the timing of any changes to the balance sheet, the minutes simply noted that implementation of the program would begin “relatively soon” and that a decision could come at “an upcoming meeting.” The minutes didn’t say if that was a reference to the meeting late next month.

To sum things up, Fed officials seem bent on a patient approach, and keep talking about a “gradual” return to more normal rates. Nothing we saw in the minutes changed that, and chances of a third rate hike this year or any dramatic action on the balance sheet seem to be retreating. It appears more likely that the Fed might keep its powder dry on the rate front as more data pours in, and perhaps begin to take light action on the balance sheet to see how it plays out in the market.

Speaking of the Fed, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari are both scheduled to speak today, so maybe they’ll shed more light.



The dollar fell against the yen and euro Wednesday amid a dovish take on Fed minutes, but has generally moved higher against both currencies since last week. Strong U.S. economic data appeared to help the dollar vs. the euro, while the yen has given up a little ground with the decline in geopolitical tension from last week. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Dollar on the March: Just a couple of weeks ago, there was a lot of concern about the continued slide in the U.S. dollar and what it might indicate about the economy. While the dollar hasn’t gained too much since then, it appears to have arrested its slide at least for the moment. That could partly reflect some strong recent data, including July payrolls and retail sales. The dollar made further gains against the euro and yen Wednesday and the dollar index rose above 94 for the first time in nearly a month. The euro fell to $1.17. Not too long ago, it looked like the euro was on the march to $1.20. While that still could happen, the dollar made a strong stand until late Wednesday when the perceived dovish tone of Fed minutes knocked it off track a bit.

Say Goodbye To Earnings Season: We’re about 92% of the way through earnings season, and nearly 74% of S&P 500 companies have exceeded earnings estimates, reported. That’s above the historical average of around 64%. More than 68% have topped revenue consensus, also above an average of 59%. Consumer discretionary and staples stocks have seen the slowest earnings growth, up 3.6% and 4.6%, respectively. That said, many analysts predict slower earnings growth in coming quarters. Comparisons could get tougher next year as companies have to compete against their strong results from the first half of 2017.

Technical Matters: Back about a week ago before the North Korea/U.S. tensions flared up, we mentioned that technical support for the S&P 500 Index (SPX) sat in a range between 2423 and 2441. Since that point, the SPX has gone down to test the middle of that range before bouncing back pretty solidly these last few days. Resistance higher up now appears to be at around 2475, according to research firm CFRA, and, coincidentally or not, that’s right where the SPX topped out during intraday trade Wednesday. Keep an eye on that level going forward.

Good Trading,

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