Market Overview

Defensive Mode: Caution Still The Watchword With Costco, Uber Earnings Later This Week

Share:
Defensive Mode: Caution Still The Watchword With Costco, Uber Earnings Later This Week

After a long holiday weekend watching auto racing, hosting and attending barbecues, and enjoying the late spring weather, investors regroup today to a stock market that’s played defense for weeks and feels exhausted as summer begins.

The Dow Jones Industrial Average ($DJI) fell last week for the fifth week in a row, its longest losing streak since 2011. Though the S&P 500 Index (SPX) did bounce off of recent lows, it remains down around 4% from all-time highs posted in late April. A mixed tone prevails in the early going Tuesday, with direction a little hard to find as news looks thin. A full data calendar this short week could help lend some direction as the days pass.

Overseas events—mainly China and Brexit—arguably represent a stiff headwind for Wall Street, with British Prime Minister Theresa May’s resignation announcement only the most recent gust as a pro-Brexit party made election gains in Britain.

May’s departure could raise chances of a “no-deal” Brexit, some media outlets report, and no one is really sure what that might look like. If there’s one thing the markets don’t relish, it’s uncertainty, which could help explain the cautious trading that’s taken hold. 

On the China front, President Trump wrapped up a visit to Japan Tuesday saying he’s not ready to make a deal with Beijing, but thinks one eventually will come together. Until there’s more signs of progress there, it’s hard to imagine a major recovery for stocks. With European elections and trade talks with Japan also in the mix, many investors seem to have a “risk-off” mentality at the moment.

One sign of possible caution is strength in the Treasury market. U.S. 10-year Treasury yields fell below 2.3% to one-and-a-half-year lows early Tuesday. Treasuries have really caught a bid here this morning, rising rapidly and pushing yields back toward last week’s low mark. 

Yields move the opposite of the underlying product, so the recent yield collapse likely signals more investors pumping money into where they apparently see safety, the U.S. Treasury. The dollar—often seen as another defensive asset—has also been strong lately, though it fell Friday. Risk-off trading might reflect investor concerns as U.S. business investment slows (see more below) and some retailers warn of supply-chain issues related to the trade battle with China. 

Shoes for Christmas?

Speaking of supply chains and China, things you might not have even thought of start to factor into this, like Christmas lights. Almost 95% of them are manufactured in China, the Conference Board President and CEO noted late last week. It’s a small thing, but it adds up to a lot of dollars when you consider how many Christmas trees go up every December and the chance of consumers having to dip deeper into their pockets or go without.

Then we have companies like shoe seller Foot Locker, Inc. (NYSE: FL), whose shares fell nearly 16% Friday and lost all of their 2019 gains after FL missed Wall Street’s earnings expectations. The company cut its full-year guidance amid worries about how tariffs could affect its sales. FL was one of the companies signing a letter to the Trump administration last week warning how tariffs could hurt their businesses.

Maybe an interesting homework project for investors would be to start researching which companies have done a better job inoculating themselves against potential tariff impacts. While no company is necessarily a perfect example, Adidas AG, whose stock trades in Europe, switched its suppliers to Indonesia and Vietnam a while back, making a concerted effort to get out of China. Some economists say other companies that may be somewhat less exposed to the tariff war include Amazon.com, Inc. (NASDAQ: AMZN), Target Corporation (NYSE: TGT), and Macy’s Inc (NYSE: M). 

One way to research the company impact is to go back to Q1 earnings call transcripts or listen to earnings calls coming up next quarter to get a sense of the exposure various companies face. If you have the time, consider reading about the risks companies face in their recent reports to the Securities and Exchange Commission (SEC), which companies have to include in regular filings. 

The other question to think about researching, besides sourcing, is whether companies that do source from China have the brand power to raise prices and pass some of the added costs on to the consumer without losing business. Those that can’t could start to see their margins pressed.

Price Check

It’s harder to determine whether China woes might have be priced into some companies’ shares after weeks of turmoil. One example could be Ralph Lauren Corp (NYSE: RL), which has had a rough go of it lately in the stock market due in part to its China exposure. However, one analyst argued last week that the bad news is priced into the stock. It’s an individual story with each stock, so investors should consider doing the footwork if they own shares of specific companies and trying to get a sense of where things might stand.

From a technical standpoint, the old week ended with the SPX in relatively decent shape. That’s because it didn’t fall below what some analysts see as technical support near the 2800 level. The SPX tested that area twice this month and bounced off each time, possibly a sign of resilience. That doesn’t mean, however, that we can necessarily expect a quick re-test of the highs. That seems unlikely unless the trade picture suddenly improves, but both sides seem to be digging in their heels.

There’s a lot of data packed into this short week (see more below), but arguably nothing stands out more than the government’s second estimate of Q1 gross domestic product (GDP), due early Thursday. Last time out, we got a bullish surprise growth number of 3.2%, and analysts look for 3.1% in the second estimate, according to a Briefing.com consensus.. This comes as estimates for Q2 GDP continue to sink, with JP Morgan making headlines Friday with its forecast for just 1% GDP growth in Q2. The Atlanta Fed’s forecast isn’t much higher at 1.3%.

Earnings season has faded to a whimper, but there’s a  scattering of reports arguably worth a look this week, including Costco Wholesale Corporation (NASDAQ: COST), Gap Inc (NYSE: GPS), and Uber Technologies Inc (NYSE: UBER). For UBER, it’s the first earnings report since going public, and the company has already forecast a big quarterly loss. The stock is trading a little below its initial public offering (IPO) level.

Crude is another important factor to consider watching this week after U.S. prices fell to two-month lows below $60 a barrel over the last two trading sessions. Early Tuesday, crude rallied again and now is flirting with the $60 level. U.S. crude stockpiles have been on the rise, but gasoline stocks remain below their historic averages. That might be one reason why gas prices are up more than 60 cents a gallon since the start of the year and reached a new peak recently even with crude prices down about $10 from their spring highs. 

It wouldn’t be too surprising to see gas start to drop from this point as stockpiles have grown recently and the big holiday driving weekend is now in the rear-view mirror. On the other hand, some analysts think gas prices could rise even more as refiners switch to more expensive summer blends.
2019-05-28-chart.jpg  
Figure 1:  SOMETHING TO CHEW ON: Corn futures (candlestick) head into the summer growing season on a real tear, up sharply over the last two weeks as many farmers eye their flooded fields and switch to soybeans (purple line) instead. The anticipated additional soybean acres, along with lack of demand from China, have soybean futures looking flat over the same time period. Data Source: CME. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Consumers, Start Your Engines: A lot of data are packed in a small package this shortened week, starting with consumer confidence for May later this morning. That could be an interesting one to watch, because it captures sentiment from after the China trade talks went south and stocks started to flag. Last time out, for April, confidence surged along with the market as stocks neared record highs. The 129.2 headline reading in April was up several points from March, with consumers especially optimistic about the near-term outlook. We’ll see if that sagged at all in May, as the consensus view reported by Briefing.com stands at 130. The other consumer metrics to potentially keep an eye on this week are personal spending and income on Friday along with University of Michigan Consumer Sentiment the same day. Basically, investors are likely to exit the week (and the month) with a much better idea of how consumers feel about the economy, especially after a mixed outcome from the recent retail earnings season.

Businesses Downshift Spending: Looking back at data from the end of last week, it was a bit concerning to see capital investment from businesses continue to look soft in core capital goods orders for April. That reading, which doesn’t include defense or aircraft spending, was down 0.9% from the previous month, and capital goods spending growth just had its worst 12-month period of the Trump administration with a rise of just a little over 1% (that compares to double-digit yearly growth readings a couple of years ago). Total durable orders fell 2.1% in April, but that partly reflected Boeing Co’s (NYSE: BA) issues with its 737 MAX. 

Many economists have already noted softness in business spending this year, which could indicate lack of economic confidence among decision makers at some of the country’s biggest companies. Recent pullbacks in guidance for the remainder of the year, which we saw during the earnings season, add to a sense that businesses aren’t going into the second half of 2019 feeling all that optimistic about where growth might go from here. This also could end up weighing on merger and acquisition (M&A) activity if it continues, because arguably businesses won’t necessarily want to expand in an uncertain environment with Brexit and China trade issues still dominating discussion. We’ll have to wait and see.

Soggy Silos and Inflation: Corn prices exploded recently due in part to flooding in the Midwest, and that could play into inflation readings in coming months. Remember, corn isn’t just about the corn on the cob you and your family might have munched over the holiday weekend. It’s mainly used as an animal feed, and when it gets more expensive it sometimes leads to higher meat prices. That could be something to track. Besides the flooding, which according to some reports left many silos of stored grain unusable due to wetness at the bottom of the silos where the grain was housed, the China trade situation also plays into the corn market (as it seems to with just about everything). There’s talk that farmers might plant more soybeans this year, not just due to flooding but also because the government is reimbursing soybean farmers for lost exports of the commodity to China. Soybean exports are down dramatically the last year or two. When more soybeans get planted, that typically eats into corn acreage.

Anyway, the place to look for any possible food price impact will be in coming inflation data. The Fed’s favored reading, the Personal Consumption Expenditures (PCE) prices report for April, is due this Friday.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Posted-In: Earnings News Guidance Eurozone Retail Sales Global Markets Tech

 

Related Articles (AMZN + BA)

View Comments and Join the Discussion!

10 Biggest Price Target Changes For Tuesday

Apple Launches New iPod Touch