Another Bank Beats: Morgan Stanley Latest To Exceed Expectations On Strong Trading

The earnings parade has started on a positive note and that could be providing momentum early Thursday as markets appear set to re-test record highs.

Morgan Stanley MS became the latest big bank to open its books Thursday morning as the company easily beat analysts’ estimates on both revenue and earnings per share. Trading activity looked good, which was nice to see. The fixed income and wealth management businesses both came in firm, though remember that comparisons weren’t too difficult in Q4. Shares got a lift in pre-market trading. 

Other bank stocks appeared to get a boost from MS early Thursday after a tough day Wednesday, with shares apparently up in sympathy with MS. Overall, the six biggest banks did a pretty good job kicking off earnings season, though it wasn’t a perfect performance considering continued struggles at Wells Fargo & Co WFC and a big charge taken by Goldman Sachs Group Inc GS. Four of the six beat analysts’ earnings and revenue estimates, however.

If you’re disappointed in their stock market performance over the last few days, remember that most of these companies had racked up impressive gains over the last three months, and it probably would have taken some really spectacular earnings to push prices a lot higher.

One takeaway is that fixed income trading at many of these firms rebounded sharply last quarter from a year earlier, when trading volume sank in a depressed market. The comparisons might get a little more challenging from here on. 

It’s not all bank earnings this morning. December retail sales rose 0.3%, right in the middle of the dart board as far as analysts were concerned. That might sound just OK, but if you strip away auto sales—which we already knew were a little soft that month—the number rises to 0.5%, which is the strongest growth in five months.

It’s probably going to surprise no one to hear that department store sales fell and internet sales rose, by the way. Sales at “non-store retailers” rose more than 19% from a year earlier, the Commerce Department said.

Jobless claims, which had ticked up for a couple of weeks back in December, continued marching back down with just 204,000 filed last week. That’s the lowest they’ve been in a while, so that brief surge a month ago appears to have been holiday related.

Meanwhile, crude just can’t seem to get out of its own way this week. U.S. prices fell back toward yesterday’s lows under $58 a barrel early Thursday. Crude is scraping around near six-week lows.

No Christmas Ponies For Target

Target Corporation TGT shares tanked more than 6% Wednesday after the company reported disappointing holiday sales growth, especially in toys and electronics. While some of the comparisons vs. a year ago were pretty tough, TGT’s sharp price decline maybe provides more evidence of how investors will punish companies that don’t meet their expectations in Q4. With consumers this healthy, any retailer that didn’t appear to reap the benefits is probably going to see its stock taken down a notch.

The weakness in TGT’s holiday sales follows soft holiday results from several other major retailers last week, including Macy’s Inc M and Kohl’s Corporation KSS. Some analysts pointed out that TGT’s online sales rise also wasn’t that impressive, which raises questions for investors ahead of earnings reports from Amazon.com, Inc. AMZN and Walmart Inc WMT. If TGT’s online sales didn’t gallop in December, does that tell us anything about other retailers that peddle all or many of their wares electronically? AMZN reports later this month, so we’ll probably know soon enough. 

Though the S&P 500 Index (SPX) managed to avoid recording consecutive down sessions for the first time since Dec. 10, it did give back a lot of Wednesday’s early gains. You never want to call a single day a trend, but it’s interesting to see how buyers appeared to be moving out of some of the cyclical sectors and into shares of “defensive” ones like Utilities, Staples, and Real Estate. A sluggish reading on December producer prices Wednesday, along with the disappointing TGT news, might have depressed buying interest in the Consumer Discretionary sector.

Investors appeared less than excited about bank earnings, judging by how Financials performed Wednesday. The sector was second-to-last on the leaderboard, ahead of only the struggling Energy sector. Crude stockpiles unexpectedly fell in the U.S. last week, but gasoline supplies rose to nearly 11-month highs, the government reported.

Watching The Curve Flatten

Also, bonds got a bid Wednesday as the 10-year yield fell below 1.8%. That’s in the middle of its recent range (see more below), but not necessarily a sign of investor excitement about the economy. It looks like some institutional buyers have been rotating into long-term bonds recently.

The Fed has been intervening since last fall through repurchase agreements, or repos, and that program is set to run through Feb. 13, the Fed said Tuesday. The Fed’s interventions might have helped set off the stock buying spree seen since October, and The Wall Street Journal said some analysts think the “repo” program might last into summer. That said, what happens if it ends in mid-February? Maybe some investors are beginning to rotate into longer-term bonds in preparation of that possibility. 

Yield on the 30-year Treasury bond has fallen 13 basis points since a recent peak on Jan. 9, but the yield on the 10-year is only down three basis points since then. That’s a pretty strong sign of buying interest in longer-term bonds, something investors tend to do when they’re less certain about economic strength.

Also, it looks like the closely watched “yield curve” between the two-year and 10-year Treasuries is flattening, sitting at 22 basis points this morning, down from 29 a week ago and 34 at the end of December. It fell into negative territory in mid-2019, a situation some analysts warned historically precedes recessions, though there’s no proof it causes them. A flatter yield curve also isn’t necessarily the best news from an economic standpoint, and it could hurt the Financial sector in particular by pressing bank margins. It might be a good idea to keep an eye on these yield relationships in coming days, as well as on cyclical vs. defensive stock sectors. 

The other uncertainty hindering Wall Street late yesterday was reaction to the trade deal signing, which left U.S. tariffs in place on $370 billion in goods, or about three-quarters of U.S. imports from China. It looks like the two countries kicked a lot down the road, including the ultimate decision on those remaining tariffs and some prickly subjects like intellectual property and forced technology transfers.

For a long time, we’ve been saying not to count on trade tension to simmer down until pen hits paper on an agreement. The first phase got signed, but now it looks like we’re set up for more of the same grinding negotiations while tariffs keep prices on many goods artificially high. It’s nice that the two countries seem to be trying to ease tensions, but anyone who thinks this is all over is probably setting themselves up for disappointment.

CHART OF THE DAY:  FEAR OF HEIGHTS? That blue line is the 200-day exponential moving average for the S&P 500 Index (SPX-candlestick) over the last six months. Notice how last fall the SPX bounced off of the moving average a few times before its intense turn higher starting in early October. Now it’s well above this key technical support point, which means there isn’t necessarily a lot of solid technical footing below. Data Source: S&P Dow Jones Indices.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Semis Slowing Down? In this case, we’re not talking trucks, but semiconductor stocks. They’re up since the start of the year as the PHLX Semiconductor Sector Index has risen more than 2%. However, several big names, including Nvidia Corporation NVDA, Micron Technology, Inc. MU, Intel Corporation INTC, and Texas Instruments Incorporated TXN lost ground by midday Wednesday. This ironically happened just around the time the U.S. and China signed their first phase trade agreement, which analysts have said could improve trading relations and perhaps give semiconductor stocks a boost due to their heavy China exposure. That means some of the last day’s sag in the sector might reflect buy the rumor, sell the fact sentiment, considering how far and fast many shares rose over the last few months.

We’ll get word from ground level next week when TXN and INTC are scheduled to report, followed by Advanced Micro Devices, Inc. AMD later this month. What, if anything, might slow this sector? Any evidence of lower data center spending or weaker chip sales would be possible red lights, and there’s also the potential of increased competition starting to weigh on some firms. We’ll have to wait and see.

Hammer and Nails: Has the sound of hammering echoed around your neighborhood lately? Looking back at December’s jobs report, the construction sector added 20,000 positions. That was a decent number, but not amazing. As one analyst pointed out on CNBC, housing is one area of the economy where inflation is actually a problem, and part of that is due to lack of new housing supply. A boost in construction jobs over the coming months—if it happens— might indicate more supply down the road, maybe making homes a little more affordable and putting a charge into the housing market. When housing is healthy, that can have a reverberating impact around the economy. Everyone from moving companies to appliance makers and banks can get a lift when more people buy homes.

Slow-Walking Yield: After recording steep gains and losses through the first nine months of 2019, the benchmark 10-year U.S. Treasury yield has basically been stuck in place since mid-October. It hasn’t moved much above 1.9% or much below 1.7% since then. That’s a pretty narrow range of around 20 basis points compared with an epic 180-point rise between mid-2016 and late-2018 and then a dramatic plunge almost all the way back between late 2018 and August 2019. Of course, a lot of this had to do with an active Fed. Now the Fed seems to be in a holding pattern, and so do yields.

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