Capital 19 Catch-Up

Chinese Economic Data and US Retail Sales Worry Investors As The Fed Eye Next Stimulus Moves

A combination of Federal Reserve comments on bond purchases and economic data out of China spooked US markets last week, with a Friday bounce back not enough to stop the major indices closing with weekly losses. Retail sales data was also a cause for concern, however, this wasn’t reflected in the retail earnings announcements with most of the big names showing impressive earnings beats for the second quarter.

After a heavy week of selloffs, investors decided to buy the dip in the Friday session but the reversal wasn’t quite enough to replace the losses. The Dow was the hardest hit for the week, losing 1.1%, as financial and energy stocks, in particular, had a hard time of it. The Nasdaq fell 0.7% for the week despite a strong day for tech stocks to finish out the week. While the S&P500 was the best performer, losing 0.6% over the five sessions.

With a small gain in the Monday session, the benchmark S&P500 gained its 49th record close for the year out of 156 trading days. That’s a record close 31% of the time which is the most frequent in recorded history back to when records began back in 1950. The Monday session also officially marked the doubling of the index since the pandemic low of March 23 2020. It was the fastest doubling of a bull market since the recovery following World War 2.

The Chinese data that came out last weekend kept markets wary in the first half of the week as investors feared a slowing global economy. China retail sales were up 8.5% however this was well below the expected 11.5%. Chinese Industrial production was also up 6.4% but this was again short of the 7.8% economists had been expecting. China’s National Bureau of Statistics pointed to domestic flooding that had impacted the nation in July, but also to the impact of rising Covid cases as they stated the country’s “economic recovery is still unstable and uneven.”

The US economic data wasn’t much better with housing starts falling by 7% in July and retail sales falling by 1.1% (more than the 0.3% expected). Sales of cars and car parts accounted for most of the fall, but there were also worrying drops in clothing and online sales. There was, however, a shining light in the outdoor dining scene with sales across restaurants and other food outlets seeing sales increase by 38.4% year on year. This bodes well for all of the food and drinks suppliers we hold in our portfolios.

The poor economic data in both China and the US had a major impact on the price of oil, as investors feared the slowdown could well be occurring right across the globe. By Thursday the price of West Texas Intermediate crude oil had fallen for six straight sessions which was its longest losing streak since February 2020. Overall the oil price fell 9% for the week, closing at levels not seen since May. Oil producers such as Diamondback Energy (FANG) and Valero (VLO) were also hit hard, with the two dropping 9.9% and 9.1% respectively.

The minutes from the last Federal Reserve meeting came out on Wednesday and the market experienced its worst trading session of the week. The minutes revealed a majority of members foresaw the tapering of bond purchases reducing by the end of the year, perhaps even as early as September. The statement read ” Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year”. There were a few holdouts who want to see tapering held off until 2022 but it seems extremely likely that the Fed won’t wait that long. My tip is it will begin in October. The good news is the market is expecting it now so there won’t be any shocks.

The earnings this week had a retail focus and most beat estimates comfortably, although this didn’t always reflect in the share price reaction. Home improvement retailer Lowes (LOW), think Bunnings here in Oz, was a standout, smashing on the top and bottom line and jumping 9.5% in response. Apparel retailer TJ Max (TJX) was also a winner, jumping 5.6% after same-store sales jumped 20% on the 2020 second quarter. The worlds largest retailer Walmart (WMT) also easily surpassed expectations as management stated customers fueled strong grocery sales and back to school spending, while also seeking out luggage, party supplies, and clothing. Walmart fell 2.8% in the Wednesday session, however the fall could also be attributed to the market sell-off on the same day.

Home Depot (HD) was another that beat estimates but fell after announcing. Investors were concerned the home improvement chain saw a 5.8% drop in customer transactions for the period as the DIY trend weakened. Home Depot lost 4.2% in the Tuesday session. Chipmaker and Catch Up favourite Nvidia (NVDA) didn’t have the same problems despite what was a tough week for the semiconductors due to the Chinese data. NVDA rose 3.9% following the results (and 10% in the last two trading days of the week) as they reported a big lift in graphic card sales and revenue rose 68% annually during the quarter. Gaming sales were up an impressive 85% while its data centre business also hit record revenue of $2.37 billion, a rise of 35%.

The retail earnings results will continue in the week ahead. We’ll see results from the likes of Best Buy (BBY), Dick’s Sporting Goods (DKS), Dollar General (DG), Gap (GPS) and Peloton Interactive (PTON). We’ll also see announcements from Toll Brothers (TOL), (CRM), Dell Technologies (DELL), and Marvell (MRVL). The economic calendar sees existing and new home sales for July, Durable goods orders, and GDP revision for the second quarter.

Elsewhere, the annual monetary policy symposium usually held in Jackson Hole, Wyoming, will be moved online again in 2021 due to pandemic concerns. Fed chair Jerome Powell will have a scheduled address on Friday which will be closely watched for any hints of stimulus tapering. Investors will be hoping the latest covid numbers will have an impact on the Fed decision making. It’s unlikely however that JPo will come out with anything too market shattering. He knows how to play his cards close to his chest.

Have a great week.