Wind At Our Backs

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Posted: Aug 17, 2018 12:01 PM
Wind At Our Backs

What a rebound for the market on Thursday. It seemed to be paying more and more attention to exogenous events and speculation than factual developments and strong trends.

Yesterday, White House economic advisor Larry Kudlow pointed out some of those trends, including current Gross Domestic Product (GDP) trends:

  • 1st Half 2018: 3.1%
  • 2Q: 2018 4.1%
  • 3Q: 2018 4.3% (Atlanta Fed)

Consumer Charge

Walmart (WMT) posted earnings results that exhibited pricing power and market share gains, lifting its shares and carrying the entire market along for the ride: 

  • Traffic: +90 Basis point (bps)
  • Ticket: +180 bps

Comp-Store Sales

  • U.S. Walmart: +4.7%
  • U.S. Sam’s: +7.7%
  • U.S. Total: +5.2%

After the close, Nordstrom’s (JWN) posted monster earnings results, lifting the stock more than 14%.  The company saw its best comp sales in three years. Management sees profits inflection point:

  • Sales: +7.1%
  • Comp-store sales: +4.0%
  • Digital: +23% now 34% of total sales from 29%
  • Management raised guidance on revenue and earnings

The Message of The Market

Overall it was a great day for the market and one that should give investors more confidence.  We saw a huge rally without those high-flying technology names, including Facebook (FB), Google/Alphabet (GOOGL), and Netflix (NFLX).  Moreover, consumer sentiment has shifted from defense to offense after those Walmart results. 

Technology (XLK) was missing last night along with Nvidia (NVDA) and Applied Materials (AMAT), which need strong conference calls.

S&P 500 Index

+0.79%

Communication Services (XLC)

-0.04%

Consumer Discretionary (XLY)

+0.49%

Consumer Staples (XLP)

+1.43%

Energy (XLE)

+0.72%

Financials (XLF)

+1.33%

Health Care (XLV)

+0.98%

Industrials (XLI)

+1.27%

Materials (XLB)

+0.61%

Real Estate (XLRE)

+0.78%

Technology (XLK)

+0.44%

Utilities (XLU)

+1.08%

 

The question now is can the Dow and other major indices rally to new all-time highs before Labor Day? Deere & Co (DE) could provide an answer this morning. The stock is in a descending triangle, poised for a big move.

Sunken Sentiment

I continue to pound the table on the enormous ground-swell of consumer confidence manifested in the form of a sharp increase in spending. I think this bounce in confidence will continue, in part because we are still below the peak reached back in January 2000.

Just consider that the Dow Jones Industrial Average is up 118% since that peak. It’s through a myriad of setbacks that began with 9-11 and included two major stock market crashes; a housing crash and the Great Recession. However, consumer sentiment is still below its January 2000 peak and one has to wonder why.

The Abyss of Optimism

Jan 2000

Aug 2018

Dow Jones Industrial Average

11,722

25,590

Consumer Sentiment

111.40

97.9*

                                                                                                                              *July 2018

 

There are so many narratives and theories as to why the stock market could be up so much, which begs the question: will consumer confidence remain range-bound?

  • A loss in confidence in big institutions such as government and financial industry 
  • Real wages have dragged
  • The mood of the nation has darkened
  • The stock market seems off-limits and no longer a proxy of America
  • If we break out to new highs on consumer sentiment, it could mean the sky’s the limit for the nation’s economy

Business Stepping Up

While there is no doubt the American consumer is stepping up to the plate, American businesses are stepping up as well. Larry Kudlow mentioned the “capital goods boom,” which hasn’t gotten any press coverage.  On the contrary, the media narrative has been talking about massive tax cuts, and how they are only benefiting the wealthy and corporations via stock buybacks and dividend hikes.

There is no doubt corporations are returning more to shareholders, but the amount being poured into capital expenditures is growing at a much more rapid pace.

Capex Spending Forecast

Dec 2017

May 2018

Manufacturing

2.7%

10.1%

Non-Manufacturing

3.8%

6.8%

Institute for Supply Management

 

Today’s Session

Equity futures are holding up this morning, but key earnings miss in tech and in the Dow will weigh on the markets today, coupled with general anxiety, which isn’t even defined anymore; it’s just there.

NVidia (NVDA) is getting hit on shortfalls in its crypto business, which shouldn’t be a surprise given the fact that the bloom has been off the rose for some time.

Deere (DE) missed as a result of domestic short fall, which has been an untold story for a long time, and more recently, it has been masked by retaliatory tariffs aimed to cripple American farmers even more.  Unfortunately, proponents of the White House (on everything) are only carrying propaganda water for those nations that want to hurt the nation’s bread basket.

Net Farm Income

  • 2013 $123.8 billion
  • 2014 $92.4 billion
  • 2015 $81.4 billion
  • 2016 $61.5 billion
  • 2017 $63.8 billion
  • 2018 $59.5 billion estimate

American farmers need help against the free fall in income and competing against cheaper imports.

Earnings Release

This morning, President Trump published a tweet on quarterly earnings.  I think he is spot on, and he’s not the first to suggest this, even Hillary Clinton brought up the hazards of this practice.  Sometimes, it’s not about politics but common sense and fairness.

In this case, it’s fair to businesses and investors.

Donald J. Trump? Verified account @realDonaldTrump 

More

In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

In speaking with some of the world’s top business leaders, I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

Here's another point - analysts have great access to the companies they cover and get to ask questions on conference calls, yet they can't figure out what the company will achieve in the quarter.

Check out this earnings season with more than 400 of the S&P 500 names posting results. "The Street" didn't get a single revenue number correct and only 5% of earnings numbers came in at consensus. 

This moves markets more often than not, sending stocks lower. 

S&P 500 Earnings Results

2Q 2018

Revenue

Results Versus Consensus

Earnings

73%

Above

79%

27%

Below

16%

0%

Matched

5%