Deere Valentine: Tractor Maker's Latest Results Not Exactly A Love Letter To Shareholders

Investors appeared to be looking to end the week on a higher note than that set in the last session, when stocks ended mixed.

Optimism seemed higher on thoughts that progress was made during this week’s trade talks between the United States and China in Beijing, which were set to continue in Washington next week. Market participants appear to be hoping the two sides can come to an agreement before a March 1 deadline when tariffs on certain imported Chinese goods are set to increase from 10% to 25%. In related news, Bloomberg reported that President Trump is thinking about extending that deadline. 

The trade war has been a headwind for the market for some time, with the latest fallout coming this morning as tractor maker Deere & Co. DE missed earnings estimates, saying its results were hurt by higher raw materials and logistics costs and customer concerns over tariff and trade policies. With significant investments in China, DE can be seen as one of the bellwethers for how well the economy there might be doing. So, it is often closely watched, especially with the heightened tensions surrounding the U.S.-China trade war and its potential ramifications for the global economy.

In economic data this week, consumer and producer price numbers showed that inflation seems to continue to be relatively muted, perhaps keeping the Fed on track to continue its rate-hike pause and giving the market more to cheer about. (See more below.) The Fed’s dovish stance has helped stocks rebound this year, easing worries that the central bank would make a mistake and hike rates too much despite inflation not being a major concern. 

Retail Fails

In other economic data out this week, retail sales figures yesterday disappointed the market, but Wall Street managed to post a mixed close as investors appeared to mostly shake off a much weaker than expected retail sales report. Retail sales fell 1.2% month over month, the worst monthly performance in nearly 10 years. This appeared to temporarily raise concerns about the health of U.S. consumers. 

But it’s important to put the retail number into context. Judging from the market’s quick Thursday recovery from lows, many investors appeared to do just that. While retail sales were definitely poor, a lot of the softness might be attributed to the government shutdown that started that month, along with a stock market meltdown that put the S&P 500 Index (SPX) on the verge of a bear market by Dec. 24. When stocks are cratering, it sometimes makes people a little shy about spending lots of money.

Also, the data showed retail sales weakness skewed more toward brick-and-mortar outlets, rather than online stores. So in a sense, the report didn’t tell investors much they didn’t know already considering that several department stores already reported disappointing holiday sales. Brick-and-mortar definitely struggled in December, but all the retail sales data did was confirm that.

In addition, some of the soft retail sales reflected lower gas prices, and some analysts noted that one month of data isn’t necessarily enough to make any major assessments about consumer spending. The December report does arguably make the January retail sales data take on more relevance when we get it next month, because it might show if weak consumer demand was just a one-month phenomenon or something more.

Even with gas prices stripped out, however, the declines were pretty broad-based, with sales drops in categories ranging from furniture to electronics to clothing to restaurants, the government said. Core retail sales, which are used in computation of the goods component for personal consumption expenditures in the gross domestic product (GDP) report, declined 1.7%.

Taken from a broader perspective, the report might reflect slower economic growth in Q4 than some analysts had expected. In fact, right after the data, the Atlanta Fed’s GDPNow indicator for Q4 ticked all the way down to an estimate of 1.5% Q4 GDP growth, from its previous estimate of 2.7%. If Q4 growth is 1.5%, as the GDPNow indicator predicts, that would be quite a drop from 3.4% in Q3.

On the other hand, many analysts have already said they saw worldwide economic weakness in Q4, so perhaps a lighter U.S. growth number is built in. 

Thursday's Highlight Reel

To sum up Thursday’s session, it looks like there was a quick over-reaction as the market swallowed the ugly data, followed by a realization that there really wasn’t much of anything new to see here. By the closing bell, it turned out to be a better day than it might have looked like at the start, when stocks fell about 0.5%. Treasuries, however, did rise as investors examined the retail sales data, with the benchmark 10-year yield falling back to 2.66%, from above 2.7% earlier this week.

The Nasdaq (COMP) actually made slight gains Thursday, while the Dow Jones Industrial Average ($DJI) and S&P 500 (SPX) fell a tad. Perhaps more importantly, the SPX managed a third straight close just above its 200-day moving average, which now rests at 2744. 

As you might expect on a day with weak retail sales, the consumer staples sector had a rough session, skidding more than 1.2%. Financials, which have been pretty choppy lately, also had a tough day, falling more than 1%.

Weakness in the staples sector was also helped by a worse than 8% drop in shares of The Coca-Cola Co. KO. That stock had its worst day in a decade after the company forecast 2019 guidance that was well below Wall Street’s expectations. Currency headwinds were one reason KO cited.

For a while early Thursday, the focus on retail sales overshadowed the week’s major developments in geopolitics, most of which were positive and continue to provide good momentum. Investors learned Thursday that President Trump planned to sign a bill to prevent a government shutdown, removing one source of market worry. In addition to momentum with U.S./China trade talks, Chinese exports posted a surprise 9% jump in January, helping to allay fears of a giant worldwide slowdown.

Today is the last day of trading before a three-day U.S. holiday weekend, with the markets closed this coming Monday for Presidents Day. Typically when you have a holiday weekend, you often see the market come back toward unchanged by the end of the day, with people unwinding positions as the session marches on.

Figure 1: Despite Twitches, Market Calmer Overall: Along with the jitters on Wall Street Thursday, the Cboe Volatility Index (VIX) edged higher. Notably, the fear gauge remained around 16, well below the recent highs. It shows that investors are apparently remaining relatively calm as the Fed has decided to take a more dovish stance, despite daily headlines that might move the VIX to one side of that mark or the other. Data Source: Cboe Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Money for Love: This Valentine’s Day, fewer people had planned to celebrate, according to the National Retail Federation’s spending survey. About 52% of respondents had said they planned to celebrate this year, down from 27% in 2009, for a number of reasons. Of course, some had no one to celebrate with, but others said they were simply no longer interested or thought the holiday had become too commercialized. Still, those who said they did plan to celebrate were shelling out more this year. In the past 10 years, the amount the average consumer spends on Valentine’s Day has increased by $60 to $162 as consumers are buying not only gifts for their significant others, but more gifts for their other loved ones. Jewelry, flowers, and chocolates are still popular gifts, but now so are experience-related presents like concert tickets.

Despite yesterday’s dismal retail sales number, recent retail spending trends have generally been healthy. Lately, consumers have likely had more money in their pockets as the U.S. employment scene continues to improve and more companies are starting to increase wages to get new hires. The U.S. labor market saw its 100th month of consecutive increases in January, according to the U.S. Census Bureau figures released early Thursday. 

History Lesson: Although Valentine’s Day is just the halfway point of the month, there’s been a lot for the bulls to love. And if February turns out to be the second up month in a row, then history says there could be more in store for them to swoon about. If this month results in a gain, “it would trigger an encouraging signal for the entire year,” says CFRA.  According to the investment research firm, the S&P 500 has averaged the second-worst return after September since World War II. But there have been 28 calendar years since 1945 where the index gained ground in both January and February, the firm said. And in all of those instances the S&P 500 ended up rising for the full year, recording an average total return of nearly 24%, CFRA said.

Out of the Shadows: With all the market reaction regarding the retail sales figures on Thursday, investors may not have paid as much attention to the U.S. producer price index for January. You can think of producer prices as a cousin to consumer prices. Both deal with inflation, and are important to watch for those who are trying to suss out what the Fed might do with monetary policy. With the headline PPI coming in 0.1% lower and core PPI showing a 0.3% rise on a monthly basis, on the heels of a similarly benign CPI reading this week, it doesn’t look like there would be much in the way to greatly sway the Fed from its current course of pausing on rate hikes.

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