Capital 19 Catch-Up

Impressive Retail Earnings and Manufacturing Data Lifts Markets as Bitcoin Fluctuations and the Fed Reserve Throw Out an Anchor

There were a lot of mixed messages thrown at the market in the previous week. On the one hand, we had some solid economic data showing that the economy continues to improve. Along with some impressive retail earnings proving that consumers weren’t shy to get their wallets out of their pockets in the last quarter. But on the other hand, we had the Fed hinting about the end of asset purchases, and bitcoin price fluctuations that were making crypto traders dizzy.

The Nasdaq broke a four-week losing streak last week as it inched towards a 0.3% gain over the five sessions. The benchmark S&P500 wasn’t as lucky, notching its first back to back weekly losses since February, and falling 0.4%. The Dow was the worst performer, dropping 0.5%, however, it is the only one of the three majors that is still positive for the month of May.

The bitcoin influence is an interesting one. In reality, it should have very little effect on the market overall. There are a handful of specific crypto stocks that it is obviously going to affect. And Tesla moves up and down on the bitcoin price these days after they announced a $1.5 billion purchase of the digital currency. But despite this, the crushing of bitcoin’s value of the last two weeks has been a big stock market mover.

There seem to be a couple of reasons for this, however. Firstly, no one really knows how much a capitulation of the industry would affect our financial institutions, so part of it is a fear of the unknown whenever this sort of drama occurs. Secondly, there is an argument that bitcoin investments are an indicator of investors level of risk. Bleakley’s Peter Boockvar wrote during the week “There is no question that bitcoin has been the poster child for rampant market speculation and risk appetite. It should be absolutely monitored in gauging the pulse of risk-taking, and now risk aversion.” This certainly ties in with the recent movement away from growth stocks. I can’t help feeling though that if cryptocurrencies disappeared tomorrow most of the stock market would barely notice.

The release of the Fed Reserve minutes from their last meeting also gave investors an anxious pause. The strong pick up in recent economic activity has caused some members to suggest asset purchases may need to be reviewed in coming meetings. Chairman Jerome Powell stated that “a number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” He prefaced this by saying that the recovery remained “uneven and far from complete” and the committee had not seen the “substantial further progress” needed for policy adjustments. The market is not expecting any changes until November and I suspect the Fed is of the same opinion.

It was better news on the earnings front as the big retailers took centre stage and impressed almost across the board. The strong results didn’t always translate into gains in the share price, however, as many struggled despite solid wins. It has been a theme of the current earnings season. So far we’ve had around 90% of the S&P500 announce their results with around 86% beating on earnings per share. That’s the best we’ve seen since the stats started being tracked in 2008. However, according to a study out of Goldman Sachs (GS) companies that beat eps estimates typically outperform the S&P500 by 100 basis points, yet figures from the last quarter show an outperformance of only 51 basis points.

Walmart (WMT) was first out of the blocks, seeing a sales lift from grocery and e-commerce sales, which saw revenue hitting $138.31 billion versus the $131.97 billion expected. The world’s largest retailer also lifted guidance which saw the share price jump 2.2% by the close of the session. Target (TGT) saw its first-quarter sales rise 23% and guidance that surprised to the upside. They pointed to rising vaccination rates as the main reason for the improvement, along with loyalty schemes such as curbside pickups. Target’s share price jumped 6% after the release. Macy’s (M) also beat earnings estimates and increased guidance but fell slightly less than 1%. Home Depot (HD) was in the same boat, beating on both the top and bottom lines but falling 1%.

In other company news, Ford (F) released its brand new electric ute the Ford F-150 Lightning to much excitement. The F-Series trucks are Ford’s biggest seller, so the fact that they are going electric from 2022 has massive implications for the car industry. Ford has so far invested $28 billion into electric vehicles and it’s a stark warning to Tesla and others. Wall Street was taken by the new vehicle, pushing the share price 6.73% higher after the release.

The weekly jobless numbers hit their lowest levels since the pandemic began, coming in at 444,000 this week. Analysts were expecting a number over 450,000 so it was a nice surprise for markets that haven’t seen a number this low since March 14th 2020. US manufacturing activity was also at a record high as PMI hit 61.5 in May, up from 60.5 in April. Economists had been expecting the number to stay flat. Housing starts were the only downer for the week as they dropped 9.5%, with many suggesting a shortage of lumber and labour were to blame.

In the week ahead we’ll see more earnings results from the retailers including AutoZone (AZO), Nordstrom (JWN), Dick’s Sporting Goods (DKS), Abercrombie & Fitch (ANF), Best Buy (BBY), Dollar General (DG), Gap (GPS), and Costco (COST). While we’ll also see report cards from Catch Up favourite Nvidia (NVDA), Toll Brothers (TOL), Workday (WDAY), and Dell Technologies (DELL).

Both Yum Brands (YUM) and Ford will hold investor events during the week. There’ll also be a further spotlight on cryptocurrencies as the Coindesk (COIN) Consensus conference gets underway. It will also be an important week for the pot stocks who may get a boost as more legislation is set to be introduced through congress. Data wise we’ll have New Home sales, durable goods orders, personal income, and Core inflation.

Have a great week.