(Monday Pre-Market) Earnings took a trip to the mall last week with department store results, but attention now zeros in on big-box retailers to see if strong consumer confidence translated into successful quarters for the Wal-Marts (WMT) and Targets (TGT) of the world.
While retail earnings continue to grab headlines, the other question heading into the new week is whether the market’s recent stumble has any legs. The Senate tax plan that proposed putting off corporate tax cuts for a year might account for some of the late-week selling, but simple profit taking might also be a factor after so many months of rallies. It's been a great earnings season, but it’s coming to an end, and catalysts aren’t likely to be as numerous in coming weeks. That could have some investors headed toward the sidelines as the holidays approach.
The tax reform debate continues, and the House might take a vote during the week ahead. That means D.C. politics could again help determine Wall Street’s path. On taxes, keep in mind that nothing is likely to get decided in the very near term, and probably won’t be until the House and Senate hash out details of a final proposal in committee and then take final votes. However, that doesn’t mean it’s safe to ignore the deliberations on Capitol Hill. Expectations for tax reform are high, and if Congress has trouble getting it passed that could ultimately have negative ramifications for the stock market. If it looks like there’s an impasse, it might trip up stocks on any given day.
Moving away from Washington, the retail earnings schedule starts with Home Depot (HD) before the open Tuesday, TGT ahead of Wednesday’s open, and WMT rounding things out before the bell Thursday. With those key reports out of the way, we can pretty much tie a bow around earnings season and wait until January for the next round of corporate outcomes.
Aside from earnings and politics, plenty of other developments could help move markets in the days ahead, with the most important arguably being inflation data. The October Producer Price Index (PPI) is due Tuesday morning followed by the Consumer Price Index (CPI) on Wednesday morning. Last week, New York Fed President William Dudley called recent weak inflation in the presence of strong jobs growth “a puzzle,” media reports said. He added that 2% remains the Fed’s inflation objective.
Both CPI and PPI might still show some lingering impacts from the late-summer hurricanes and hurricane rebuilding that followed. In September, PPI and core PPI rose 0.4%, while CPI rose 0.1% and core CPI rose 0.5%. The core reading strips out volatile food and energy prices.
Many economists believe the rather high PPI and core CPI numbers might have been more of a hurricane effect than any type of change in the recent low readings, but if the coming numbers continue to show more strength, that might be a sign that prices are finally beginning to reflect economic activity. Keep an eye on year-over-year core CPI, which was up 1.7% in September for the fifth month in a row. We’ll see if it starts to budge.
Other economic reports to watch include Wednesday’s October retail sales data and Friday’s building permits data. Both could shed further light on whether the low unemployment rate and hurricane recovery had any impact on peoples’ economic decisions. September retail sales rose 1.6%, with gas sales, building materials, and autos appearing to get a hurricane boost. But even core retail sales, which stripped out some factors like food and gas, increased a solid 0.6%. A repeat might add to bullish economic sentiment, but keep in mind that we haven’t had two really solid retail sales reports consecutively since early this year.
Home Depot’s earnings on Tuesday morning could shed more light on the hurricane impact. This is a company that’s often seen as something of a derivative for the home building and home renovating industry, and the question is whether its quarter reflected hurricane-related reconstruction. The stock is up solidly over the last three months, though it lost some ground over the last week. We’ll have previews early next week of all the major retail earnings reports, including HD, WMT, and TGT, so stay tuned.
As the old week ended, odds of a Fed rate hike before the end of the year fell a bit, to 91%, according to Fed funds futures. That was down from 97% earlier in the week, but generally any reading over 70% means pretty good odds of a rate increase, judging from history. The dollar lost a little ground last week for the first time in a while, and volatility ticked up a bit. The VIX climbed above 11 for the first time since late October, but remains low by historic standards and traded below 10 as recently as Thursday. Though you never want to get into making predictions, it does seem like every time volatility rose this year, it came back down pretty quickly.
Tracking Earnings Quality: You often hear about companies beating Wall Street analysts’ earnings estimates, but the quality of those beats is something that might get less attention. Some companies use complex financial engineering to improve their bottom lines, but the proof in the pudding tends to lie in revenue, which is more black and white. With Q3 earnings season just about over, the quality stands out. Impressively, 66% of companies have reported better-than-expected sales growth — well above the historic average of about 55%, according to research firm CFRA. In fact, in each quarter of 2017, the number of companies exceeding top-line estimates has been between 64% and 69%. That, says CFRA, indicates earnings quality that’s less reliant on financial engineering and more on top-line growth.
Early Look at Possible Q4 Growth: Later this month the government will come out with its second estimate for Q3 gross domestic product (GDP) after a positive 3% estimate the first time out. While we’re still in the middle of Q4, it’s an open question whether the current quarter can put in yet another 3% tally, which would make it the third straight to top that mark. Some economists think it’s possible. For example, the Atlanta Fed’s GDP Now calculator pegs Q4 growth at 3.3% in its latest forecast. That estimate is on the high side at this point, with the average analyst estimate just over 2.5%. The Q4 could reflect re-building activity after the late-summer hurricanes, and economic data we’ve seen so far through the first month of the quarter have looked generally healthy.
Financial Sector Blues: The financial sector took it on the chin last week. Most of the pressure appeared to come from fears that corporate tax cuts could be delayed until 2019. Also, Democratic wins in regional elections last Tuesday might have led to concerns about how much power the GOP has to reduce banking regulations. A third possibility behind financials’ swoon could be the housing market. The current 30-year mortgage rate of 3.9% is down from 4.3% earlier this year, according to Freddie Mac, and that might be clipping profits at some banks. Although housing prices are up 7% year over year, a continued shortage of homes and the accompanying high price tags could be suppressing home buyers, especially younger ones who might otherwise be shopping for mortgages. For further insight, consider watching how financial sector stocks react to this coming Friday’s housing starts and building permits reports.
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