This morning, we received some economic news, with the headline report coming from the Department of Commerce. At 8:30 A.M. (EST), we learned that retail sales for the month of October advanced 1.3%, which was a big improvement from the flat reading in September. The retail sector will be closely watched by investors and, maybe more importantly, by the Federal Reserve for clues to how the U.S. economy—particularly the consumer sector, which accounts for about two-thirds of the nation’s gross domestic product—is faring ahead of the all-important holiday shopping season. On the pricing front, the Import and Export Price Indexes were both down in October, suggesting some progress with regard to fighting inflation.
Later today, we will get data on industrial production and capacity utilization and commentary from a number of Federal Reserve Governors. The equity futures, which were slightly lower heading into the aforementioned retail sales release, are still indicating a modestly weaker to flat opening to the trading day stateside.
The retail industry also is the focus of those eying the corporate earnings news. Before yesterday’s opening bell, the latest quarterly results from retailing behemoths The Home Depot (HD) and Walmart (WMT) surpassed Wall Street’s expectations and the stocks of those two industry leaders rallied. This morning, the news was mixed, as mass merchandiser Target (TGT) reported weak results and again lowered its full-year profit forecast. The company, which has struggled for much of this year on inflation-driven problems, posted adjusted October-quarter earnings per share of $1.54, down nearly 50% from the same period last year and well shy of the Wall Street consensus forecast. Target also warned that it expects to post a low single-digit decline in same-store sales over the holiday quarter. Shares of Target are down sharply in pre-market action. Conversely, the stock of Lowe’s Co. (LOW) is looking at a higher opening after the home-improvement retailer posted better-than-expected quarterly results.
Meantime, the primary drivers of trading over the last week have been a few important reports on the state of inflation. Of note, consumer and producer (wholesale) prices rose at a slower-than-expected pace on both a month-to-month and 12-month basis in October. The news from overseas was not as good though, with inflation in the United Kingdom surging more than 11% last month and now at a 41-year high. That, along with escalating geopolitical tensions on reports that a missile from the war in Ukraine killed two Polish citizens, is weighing on the international equity markets this morning.
The noted tamer inflation readings stateside have raised sentiment that the Federal Reserve may reduce the size of the interest-rate increase at the December Federal Open Market Committee (FOMC) meeting after four straight highly restrictive three-quarter-point hikes to the federal funds rate. This put downward pressure on both Treasury market yields and the value of the dollar and has sparked a notable rally on Wall Street, including respective gains of 0.2%, 0.9%, and 1.5% for the Dow Jones Industrial Average, S&P and NASDAQ Composite yesterday. It also should be noted that the small-cap stocks, which typically lead the market in either direction, outperformed the larger-cap indexes.
The higher-growth stocks, which have fared poorly for most of this year, have rallied since late last week on the drop in Treasury market yields. The communication services and semiconductor stocks have performed well in recent days, which is a nice reprieve for two groups that have struggled mightily in 2022. The quotation on Taiwan Semiconductor (TSM) surged upward on news that noted investor Warren Buffett’s Berkshire Hathaway (BRKB) had taken a substantial position in the shares. However, the mega-cap technology names, for the most part, have not contributed to the recent rally, and without their participation it will probably make it harder for the major equity averages to sustain the recent upward momentum.
So what is an investor to do right now? Our first reaction would be not to throw all caution to the wind, as many of the variables that have unnerved investors this year, including the Federal Reserve on a monetary policy tightening course, are still in place. There also remains the uncertainty about how far corporate earnings growth will fall in the fourth quarter, as the aggressive interest-rate hikes earlier this year start to slow demand and lead to weaker business conditions. This was a concern expressed in the October Consumer Confidence Survey.
In this trading environment, investors may want to consider limiting their portfolios’ exposure to high Beta stocks (the ones that are more volatile than average) and focus on the issues of high-quality companies with strong balance sheets and ample cash flows. These characteristics may help those companies weather the impact of a recession down the road. The Treasury market yield curve still remains inverted, which often signals a recession is on the horizon. The recent rash of layoffs in the technology sector also may be a sign that a weaker performance for the U.S. economy lies ahead in 2023. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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