Good morning contrarians!
Stocks suffered a major selloff yesterday after disappointing earnings from Target (TGT) added to the same (inflation-based) concerns that came out of Walmart (WMT) earnings the day before. The Nasdaq dropped close to 5% and S&P 500 4%. Dow Industrials had their worst day since 2020 and finished at their lowest level since March 2021.
State of Play
As of 0630 this morning, the sell-off looks set to continue. Major indexes are down around 1.4%. Bath & Body Works (BBWI) joined the retailmageddon trade, down 8% this morning. Cisco (CSCO) is down 13% after earnings.
Bonds are seeing some bids now amid all this risk-off. The 2-year is down 5 basis points to 2.62% with the 10-year down 6bps to 2.82%. Yields move inversely to prices.
Cryptos are part of the same pattern, demonstrating once again their value as little more than a gauge of risk. Bitcoin is down 3% to trade around $29,000
Commodities are dropping, with WTI crude down 1% to $106/barrel. Natural gas is down 4%.
Earnings
The news hasn’t been all bad from retailers, as TJX (TJX) actually rallied 7% yesterday. The narrative is all about how inflation is pressuring margins however. The focus now turns to Kohl’s (KSS) and BJ’s Wholesale (BJ), both of which are due to report before the open at 0930. We also get Ross Stores (ROST) later.
Update: BJ earnings just beat on top- and bottom-line and the company maintained guidance. KSS results were mixed and the company lowered guidance for the year. That stock is down 5% in the pre-market.
Economic Data
Existing home sales are out at 1000. Economists expect 5.65 million transactions for April, down from the 5.77 million seen in March. This number has been trending downward for a bit, likely due to higher mortgage rates. Meanwhile, the supply of new homes continues unabated as we saw in yesterday’s New Residential Construction report.
This isn’t a great setup for housing. Maybe this will end up providing the impetus for selling today? It’s probably a bigger concern economically than retailer margins coming under pressure, but housing reports rarely lead to major moves in stock markets.
Seeing how it’s Thursday we also get initial jobless claims at 0830. Economists expect an even 200,000 new claims this week, down a drip from the 203,000 seen last week. This number is starting to move higher from historic lows, albeit slowly. So another one worth watching where long-term economic trends are concerned.
The Bottom Line©
It’s hard to see how this morning’s earnings will supply much relief from the retailmageddon narrative, seeing how they’re all much smaller than Target and Walmart. But then it’s a bit strange that the broader market didn’t sell off with WMT earnings on Tuesday (in fact we had a big rally).
So who knows, maybe this is all just a big overreaction by the market? It would have to be a pretty big overreaction indeed as consumer staples stocks very rarely move as much as they did yesterday. Case in point: Procter & Gamble (PG) dropped by more than 6% yesterday. How often does that happen?
If staples and retailers continue to sell off then we should finally get an official bear market for S&P stocks, potentially by the end of the day. Where things go from there is another story. Of the seven bear markets since 1970, six resulted in drawdowns of 30% or more. But then you know what they say about past performance…
BJ’s, Kohl’s Earnings In Focus After Retailmageddon: Daily Contrarian, May 19