Retailers In Focus As New Week Starts, With Target, Costco, And Kohl's Soon To Report

Some people complain that the holiday shopping season goes on and on, but how about earnings season? It’s March and a host of major retailers are about to display their financial wares in the days ahead. Earnings season officially started back in January.

As retail earnings roll along, so does the drama associated with U.S./China trade relations. Stocks climbed around the world overnight and appear to have a positive bias in the U.S. this morning following weekend reports that echoed last week’s positive tidings. The Wall Street Journal reported Monday that the two countries are “closing in on a trade deal.” It also said the tariffs imposed last year by both China and the U.S. on each others’ products could be lifted and that China might agree to import more U.S. goods.

Some of the products getting discussed include cars, natural gas, farm goods, and chemicals, so investors might want to watch shares of companies in those industries early this week to see if there’s any impact from the flow of news back and forth across the Pacific. 

In corporate news this morning, Office Depot Inc. ODP shares rose more than 12% in pre-market trading after it announced a deal with Alibaba Group Holding Ltd BABA in which it would direct customers to the Chinese online retailer for supplies it doesn’t carry. For its part, BABA customers will be asked to use OD’s fulfillment network. The deal aims to target small- and medium-sized businesses. BABA shares were up about 1.5% after the report.

After a Bunch of Attempts, SPX Summits 2800

The week also starts off with the charts looking pretty positive, as the S&P 500 Index (SPX) managed to close just above 2800 on Friday. It had eclipsed that psychological mark in intraday trade a few times late last month, but this was its first close above 2800 since Nov. 7, almost four months ago. Some chart watchers say 2815—an intraday high from a few months back—could form the next major resistance point for an SPX that’s now up more than 19% from the Christmas Eve low. 

However, the streak is over for the Dow Jones Industrial Average ($DJI). It had risen nine straight weeks heading into last week, but finished Friday’s session down five points from the previous Friday’s close. The streak of winning weeks did hit 10 for the Nasdaq (COMP), however. 

Strength in both the FAANGs and semiconductor stocks helped drive COMP to gains on Friday, possibly a signal of continued optimism about possibilities of a trade deal with China. FAANGs and semiconductors arguably could benefit from a successful end to negotiations, and it’s likely any headlines on trade could once again help determine where stocks go this coming week. 

Financials also got a boost Friday, which could partially reflect 10-year Treasury yields hitting a new February high of nearly 2.77% in intraday trade. The rise in yields came despite some mixed economic data. The monthly Chicago Purchasing Managers Index (PMI) was way above Wall Street’s expectations, but February ISM manufacturing data came in below estimates. 

That continued a recent spate of salt-and-pepper data going back to early February when a bullish jobs report was followed by a bleak retail sales report and disappointing industrial production. The coming week looks like a major one for economic numbers, with new home sales, auto sales, construction spending, and for the cherry on top, the February monthly payrolls report due Friday. We’ll preview that one later this week.

Earnings Season Just Keeps on Going

As noted above, it’s also a busy earnings week, even though the heart of earnings season is far behind us. Another spate of retailers step up to the plate, with Target Corporation TGT and Kohl’s Corporation KSS leading things off on Tuesday.

Other biggies later in the week include Dollar Tree, Inc. DLTR, Costco Wholesale Corporation COST, and Kroger Co KR, among others. Despite what’s been a decent Q4 for retailers overall and solid holiday sales from Walmart Inc WMT, the Consumer Staples and Consumer Discretionary sectors of the S&P 500 currently rank near the bottom of all sectors as far as Q4 earnings growth is concerned, up just 0.7% year over year for Staples and 8.8% for Discretionary, according to research from CFRA. 

Retail Roundup

However, those who chose certain retailers probably did just fine on Friday. One of the big stories was Gap Inc GPS rising more than 16% after the company announced it would split in two sometime next year, with Old Navy becoming a stand-alone company. This seems like it might be constructive, allowing GPS to use real estate better and focus on the parts of its business that are doing well. It might be taking a lesson from Foot Locker, Inc. FL, which is closing stores that weren’t performing.

Speaking of FL, the company announced stronger-than-expected Q4 earnings and same-store sales Friday and said it sees double-digit profit growth in the coming year. Shares rose around 6%. The strength at FL might have been behind a parallel move in shares of Nike Inc NKE. What’s good for one seems to be good for both in this case, as FL has said about two-thirds of the merchandise it bought in 2017 came from NKE (the 2018 data aren’t available yet). In Q4, FL saw double-digit average sales price growth, which is a very strong statistic that you don’t often see in retail.

On the other side of the coin, two major stocks got taken out to the woodshed on Friday. Both Walgreens Boots Alliance Inc WBA and Tesla Inc TSLA fell sharply. The WBA losses came after an analysis firm cut its price target on the company, while TSLA got whacked by investor disappointment in the car maker saying it won’t be profitable in Q1 and moving all of its sales to online.

What Else To Watch This Week

That 10-year yield might be an important metric to consider following in the coming days, because if it climbs above 2.8%, that could start getting some investors a bit nervous about borrowing costs. However, the higher yields also could be seen as a positive development, perhaps reflecting investors embracing more “risk-on” type of trades. Also, with the Fed not much of a factor, there might be less incentive for anyone to expect a swift yield rally like the one we saw last year when the 10-year galloped pretty quickly from 2.4% to above 3.2%.

The other thing possibly helping U.S. yields last week was an uptick in the closely watched German bund yield, which climbed to nearly 0.2% on Friday from recent lows under 0.1%. That might reflect a bit more investor confidence in the European economy and perhaps put the brakes on at least some of the funds directed toward U.S. Treasury notes.

Barometer Watch: Investors might want to consider watching copper futures this coming week for possible clues into where trade talks and the global economy might be headed. Copper is approaching $3 a pound, a level not touched since last June. Back then, copper prices peaked above $3.30 at a time when the common theme was “coordinated” economic growth around the globe. Copper is often seen as a barometer for global economic health because it’s used in so many electronic products. After that early summer peak, copper fell all the way back below $2.60 by December as economies in Europe,  Asia, and the U.S. started to struggle. Some of the current rally might have stemmed from a weaker dollar late last month (though now the dollar is climbing again), analysts said. Recent economic stimulus from China’s government could be another factor. Any improvement in trade negotiations between the U.S. and China might help put more “pedal to the metal.”

Consumer Watch: Last month’s retail sales report raised some eyebrows about U.S. consumer health, especially coming after softer than expected holiday sales from some of the big retailers. However, some relief might have come Friday from the University of Michigan’s February sentiment report. The headline number perked up a little from January, to 93.8 from 91.2. That’s still well below year-ago levels, and was also below the Street’s expectations, however. Consumers appeared to react positively to the Fed's pause in raising interest rates, the survey press release said. Another interesting takeaway is that long-term inflation expectations remain near the lowest level in 50 years. While that could sound positive on the surface as consumers aren’t seeing prices rise much, it also could raise concerns about potential deflation, which can happen when people put off purchases hoping prices will fall.

Inflation remains muted, with the Personal Consumption Expenditure (PCE) price index for December up 1.7% year over year and core PCE prices up 1.9%. These are numbers the Fed says it closely watches, and they remain under its 2% inflation target. That could limit market fears of the Fed getting more hawkish anytime soon.

April Showers?: It’s not too soon to start thinking about the coming Q1 season starting next month. So far, it’s not looking all that promising, according to analysts’ early projections. FactSet, for instance, expects Q1 earnings for S&P 500 companies to fall 2.7% from a year ago, with Energy, Materials, and Info Tech checking in with the worst losses. The firm also projects 10 of 11 sectors to see lower year-over-year net profit margins in Q1. It’s not exactly the best news, especially after a 13% earnings gain for the S&P 500 in Q4 following several quarters of better than 20% gains. 

The odd thing is, stocks fell in 2018 even as earnings rose double digits. Now we’re seeing stocks up double digits since late December even as projections for Q1 earnings dive into the red due in part to the effect of last year’s tax cut fading. Looking at this pattern, it might suggest the market is a leading indicator. It fell ahead of an earnings slump and now it’s rising based in part on China hopes and possibly because of a dovish Fed. The fear of rate hikes that plagued stocks last fall has basically disappeared.

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