Good morning contrarians! It is Wednesday, May 17.
State of Play
Yesterday we had Home Depot (HD 0.00%↑) disappoint investors with their earnings. This morning Target (TGT 0.00%↑) just providing a little more upbeat news, beating estimates and more importantly reiterating its outlook. But the overall caution over the US consumer remains. As of 0645 the market is struggling for direction a little bit:
Stock futures are pointing to small gains at the open, with the S&P 500 up 0.3% to lead major US indexes;
Commodities are rebounding a bit, with copper up 1.4% and WTI crude oil up 0.5% to trade north of $71/barrel;
Bonds are unchanged. The 2-year yield is 4.08%, the 10-year 3.53%.
Known Events
Another retailer, TJX (TJX 0.00%↑), also reports before the open at 0930. After the close the focus will turn to tech, with Cisco Systems (CSCO 0.00%↑) and Take-Two Interactive (TTWO 0.00%↑) reporting.
In terms of economic data releases, building permits and housing starts are out at 0830. These are two pretty important leading indicators for the US housing market. Building permits, the more forward-looking of the two, are expected to come in roughly where they were last month, at 1.44 million. Housing starts aren’t expected to budge either, at 1.4 million.
Narrative Emerging
The Home Depot news yesterday weighed on markets as anticipated. It’s not clear that Target today will be able to shift that narrative, as that company cited “continued softness in discretionary categories.” There’s also this quote from the CEO:
“The consumer is under pressure,” Chief Growth Officer Christina Hennington said. “The consistent inflation, the running out of savings as well as just economic uncertainty in general is having an impact on their choices and they’re making tradeoffs.” (Source: CNBC)
None of this is good. The US consumer has been resilient, which has kept the economy afloat the past year or more. If the US consumer starts to retrench, it will be bad for the economy. That will be bad for stocks and risk assets more generally.
The Opportunity
It doesn’t look like the market is paying all that much heed to this yet. Indeed it’s just two companies saying this and it’s not like consumers have pulled back all spending — they’re just reining in spending on big ticket items (that seems to be a consistent theme between TGT and HD earnings calls). So that make this an opportune time to take out some insurance or trim some profits.
Our friends the regional banks have quietly started to rebound again, with the KRE 0.00%↑ up almost 2% in the pre-market. The Bank of Hawaii (BOH 0.00%↑) has had a strong week, rallying more than 10% from its lows. That’s encouraging, but not necessarily the thing you want to buy into. If the last couple of months have showed us anything, it’s that there will be new opportunities to buy regional banks. Until there aren’t. But it’s impossible to time these things perfectly and it’s better to miss a little upside than buy into a dead cat bounce.
The Substack chat tracks the author’s trades in (almost) real time. The full portfolio is available upon request. Obviously this is not investment advice (duh). There may be other opportunities — and other pitfalls — not covered here. Do your own research, make your own decisions.
Target Earnings, Like Home Depot, Show Signs of Consumer Retrenchment