Market Overview

Market Taking A Step Back: Walmart Misses On Earnings, Apple Lowers Sales Guidance

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Market Taking A Step Back: Walmart Misses On Earnings, Apple Lowers Sales Guidance

It’s shaping up to be an ugly morning on Wall Street as two of the market’s biggest heavyweights suffered some bruises.

Stock futures took a dive before the bell after Apple Inc (NASDAQ: AAPL) said quarterly revenue will likely miss guidance and Walmart’s (NYSE: WMT) earnings fell short of Street consensus amid soft holiday clothing, game, and toy sales.  Shares of both took it on the chin in pre-market trading, helping drag the entire market. 

The AAPL news came out yesterday and should already sound familiar. Coronavirus in China affected iPhone sales there, which isn’t too surprising and may end up being a temporary setback if the virus eventually eases. The virus might take a hit on other companies’ earnings, too. We’ll have to wait and see how it plays out and monitor the chip sector as well. It’s not time to hit the panic button.

However, WMT’s earnings miss —which WMT said also reflected political unrest in Chile — might be a bit more of an eye-opener considering the company’s history of outpacing Street views. WMT entered earnings with an amazing track record of beating consensus in 14 of the last 15 quarters.

We’d warned that the shorter holiday shopping season might come into play for the world’s biggest retailer, and apparently that’s part of the story. In a press release, WMT said, “Sales leading up to Christmas in our U.S. stores were a little softer than expected.” It added in its presentation, “We believe the compressed holiday season, softer toy industry sales, a lack of newness in gaming, and some assortment challenges in apparel contributed to the decline.” 

WMT’s quarterly revenue of $141.7 billion missed analysts’ average expectations of $142.55 billion, while earnings per share of $1.38 weren’t really that close to the $1.44 average analyst estimate.

That said, remember Target Corporation (NYSE: TGT) also reported a disappointing holiday season, so maybe we can chalk it all up to the shorter shopping period and possibly the fact that China tariff fears still prevailed during part of the quarter. It doesn’t necessarily mean any weakness among consumers. Though WMT shares are down, investors appear to be taking it in stride, considering the small losses so far. WMT is still 2% higher than where it was a week ago.

Also on the positive side of things, WMT’s same-store sales rose 1.9% as the grocery segment looked strong. Closely watched e-commerce sales rose 35%, though most of that was due to groceries, not the holidays. These could be some of the reasons the stock isn’t getting too bad a bloody nose so far.

Still, when two leading players are under the weather, it’s hard to expect rosy cheeks from the rest of the market. AAPL’s forecast that it would probably miss its $63 billion to $67 billion revenue target due to coronavirus slammed shares of that company by more than 3% in pre-market trading, while WMT shares fell just half a percent.

There’s not much help from overseas, where European shares had already fallen amid coronavirus fears. The caseload keeps climbing in China, and there were plenty of other virus headlines over the long weekend probably keeping investors nervous. 

In a possible sign of that concern, 10-year yields sank below 1.55% early Tuesday, down from highs above 1.6% last week. Gold and volatility both edged higher in the early going and crude sank. It might be one of those days when investors have to hunker down and just face some bumps and bruises.

Earnings Results Beating Early Expectations

This holiday-abbreviated week isn’t short on earnings. With WMT already behind us, there’s a long list of smaller companies most of the week rounded out by another jumbo name in Deere & Company (NYSE: DE) this Friday. Research firm Factset expects 0.7% earnings growth for Q4, up from its original estimate of negative 1.7%, and said stronger than expected Information Technology results contributed most to the upsurge.

One of the less-known companies that might be interesting to watch is Albemarle Corporation (NYSE: ALB), which holds its earnings call Thursday morning.  Tesla Inc (NASDAQ: TSLA) has been making lots of news lately, so a big lithium maker like ALB might be able to shine a light on battery demand. Investors can then try to translate what ALB’s observations might mean for TSLA. Shares of ALB are up sharply so far this year even though the price of lithium has been under pressure for months due to a supply glut.

Speaking of TSLA, shares are up this morning after Morgan Stanley (NYSE: MS) raised its most optimistic “bull case” price target for the company to $1,200 a share from $650. That’s based on bullish assumptions about potential market share.

Shifting attention to the old-fashioned way to fill up your car, crude finished last week on a high note. Still, it could face more headwinds, and is back down below $52 a barrel early Tuesday. Goldman Sachs (NYSE: GS) recently slashed its crude price target for the year, citing China. GS predicts Brent crude prices to range from $53 a barrel in Q1 to $65 a barrel by Q4, with U.S. prices about $4.50 a barrel lower.

That’s rough news for the slumping Energy sector—which is down double-digits year to date—but good to hear if you think low gas prices can keep U.S. consumers out shopping for discretionary goods. So far this earnings season, not many companies have complained about energy costs being an issue. Natural gas, which has many industrial uses including in chemicals and plastics, fell near four-year lows near $1.80 per million British thermal units (BTU) last week before ticking up this morning. 

Moral Victory

Though last Friday seems long ago and far away thanks to the extended weekend, let’s not forget that Wall Street arguably won a moral victory that day. With many analysts convinced there’d be weakness ahead of three days off, two of the major indices managed to eke out gains. 

While the Dow Jones Industrial Average (INDEXDJX: .DJI) and the Russell 2000 (INDEXRUSSELL: RUT) finished in the red Friday, it was a solid week for stocks and didn’t feature any big sell-offs like prior weeks. For the full week, the S&P 500 Index (INDEXSP: .INX) and $DJI rose 1.6% and 1%, respectively. The Nasdaq (INDEXNASDAQ: .IXIC) gained 2.2%, helped by semiconductor stocks. 

It could be interesting to see what the chips do for an encore after gaining nearly 5% last week.

Last Friday saw semiconductors step back, with the key exception of Nvidia (NASDAQ: NVDA). That stock had an amazing day, rising 7% to new highs as investors applauded a solid earnings report driven partly by data-center sales.

The coronavirus probably plays a big part in this morning’s air of uncertainty, which carried over from last Friday.  Many people likely huddled close to the warm glow of so-called “safe haven” investments toward the end of last week as part of a protective strategy ahead of the long weekend. Even though investors weren’t necessarily cashing out of their stock market gains, they did seem to be parking money in the slow lane, too, not knowing what might develop over the next few days.

Last week’s late-breaking data arguably deserve a second look before moving on. Retail sales rose 0.3% in January, and analysts labeled that a “modest” gain. It continued a string of months where sales rose less than 0.5% and could contribute to ideas that Q1 gross domestic product (GDP) growth might be modest, too, Briefing.com noted. Still, consumer sentiment for February was above expectations, so it doesn’t sound like coronavirus is having a big impact on U.S. consumers’ sense of well-being. At least not yet, anyway. 

More positive data popped up this morning as the Empire State Manufacturing Index rose to 12.9, the highest since last May and way above analysts’ consensus of 4. New orders and shipments looked strong.

Data this week include January producer prices, due tomorrow morning. Last time around, both headline and core producer prices rose 0.1%. Analysts expect similar readings this time, according to Briefing.com. Other numbers this week include housing starts and building permits, along with existing home sales. The housing market got help in 2019 from low interest rates and strong job growth, so it could be interesting to see if those trends kept boosting demand as the calendar turned.

CHART OF THE DAY: JETLAG. After outpacing the S&P 500 Index (SPX—purple line) through the second half of 2019, the Dow Jones Transportation Index ($DJT—candlestick) took it on the chin during the second half of January. The disparity extended on Friday, with SPX making a new high while $DJT fell more than 1%. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

What Might Emerge? Just when a lot of equity analysts started touting beaten-down emerging markets as a possible alternative to high-priced U.S. stocks, in stepped coronavirus to sap some of the enthusiasm. Emerging markets include China, where the virus continues to be arguably the biggest story of the year. One closely watched emerging markets index, the MSCI Emerging Markets Index (MXEF), is up just about 6.4% over the last year, which doesn’t compare very well with the SPX. The MXEF was actually on a roll heading into January, but then dove once the virus took over the headlines.

Dollar Another Barrier Abroad: Another possible strike against emerging markets is the firm dollar. So far this year the dollar—which had been retreating a bit thanks in part to Fed rate cuts—is back in solid shape. That’s partly because the U.S. seems more insulated from the coronavirus and because despite the rate cuts, U.S. interest rates remain at a big premium to most overseas yields. A strong dollar tends to mean higher costs for overseas consumers for everything from U.S. technology equipment and cars to crude oil (which is denominated in dollars). Higher costs can slow consumer and corporate spending, potentially hurting economic growth in these emerging parts of the world. On the positive side, the MXEF did bounce back pretty quickly this month from its virus-battered lows, but remained in the red year-to-date.

Construction Boom: Back home, on the other hand, enthusiasm goes well beyond just the stock market. While it’s only anecdotal, recent conversations with people in the real estate industry indicate that developers are enthusiastic to take on new projects. To reinforce that, look around the skylines of New York and Chicago, for instance, and see all the construction cranes. The worrisome thing is to consider what might happen if interest rates suddenly spiked. That possibly brings to mind images of cities in China with lots of new buildings and no one to move in.

That’s not necessarily going to happen here, though it’s impossible to predict. What this exuberance might mean, though, is that a lot of money seems to be rattling around right now. Some of this cash is apparently going into new construction projects, while some is being fed into so-called “safe haven” areas of the market. At the same time, money keeps rolling into the major tech names like Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com, Inc. (NASDAQ: AMZN), and the chip sector.

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.

Image by Matias Cruz from Pixabay

 

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