The Week Behind

In another tough week for stocks, all the major indices closed the week down ~3%. On Monday, the 10-year fell to ~2.7%. However, equities, even the IR-sensitive NASDAQ, failed to stage a convincing bounce. Turnaround Tuesday lived up to its name as Shanghai was awarded “0-COVID” status, fueling hopes that shutdowns in China may come to an end. Unfortunately, there was no follow through on Wednesday as earnings from Target showed inflation may finally be weighing in on consumer spending. Thursday’s trade featured an opening dip into a relatively stable close. Friday’s open was similar to Thursday’s until the S&P 500 officially entered bear market territory. At that point, all indices staged a major reversal into the weekend.

What Happened on Wednesday?

Wednesday’s report from Target shook sentiment surrounding the consumer, and in the process, claimed one of the final safe haven sectors: consumer staples. Until this point, a majority of data showcased a strong consumer: high savings, low unemployment, good in-store foot-traffic, elevated travel-spend, etc… The only data to suggest the contrary was rising monthly credit card balances. 

In the days prior, earnings from Walmart (WMT) and Lowes (LOW) began painting a picture that consumer appetite may be changing. In the eyes of the market, at least as illustrated by the merciless selling that followed, Target’s (TGT) report confirmed this shift. Brain Cornell, Target’s CEO, was extremely specific: food, travel-accessories, and toy segments (for birthdays/gifts) remained hot, but the home improvement and upgrades segments (electronics and furniture) cooled significantly. Consumers are spending more on “experiences” and less on “things”. 

I know Home Depot (HD) was a standout. The market has mistakenly lumped in HD with the likes of WMT, TGT, and LOW. HD tends to go as home values go due to a unique customer segment HD dominates: professional contractors. Consequently, as long as home values remain high and the supply-demand imbalance in housing persists, homebuilders will not cancel projects and contractors will continue to buy raw materials as needed.

Friday’s Reversal

As for Friday, I attribute the bounce to algorithms buying as the S&P officially entered bear market territory (20% down from ATH) and the 5/20 monthly puts expiring. 

The Week Ahead

We got another reversal; we are still overdue for a bounce. Look for signs of follow-through via 90-10 advancing-declining, indices closing up 1-2% on consecutive days, strong closes following weak opens, etc… As per the 10-year yield, its inverse relationship with equities did not hold up this week. If it spikes above 3% again, then we could see selling accelerate, but there were sessions this week featuring simultaneously declining yields and stock prices.

With respect to earnings, I’ll be watching Nvidia (NVDA) on Wednesday and Costco (COST) on Thursday. Both report after the close. 

• NVDA is likely to miss given shutdowns in China. Assuming a miss, I’ll be interested in the market’s response. If NVDA has a down open and finishes higher, then perhaps the selling in semiconductors is finally over in the short-to-medium term. Furthermore, the semiconductors have served as leading indicators in this market: the first the fall in sell-offs and the first to rise in rallies. It could be the spark needed to ignite the bear market bounce many are calling for. 

• Courtesy of WMT and TGT, COST dropped ~16.5%, $82, over the last 5 sessions. Considering the value they provide members at the pump and their product mix, I expect them to have a strong quarter, buoying the stock, and perhaps the sector with it. However, it should be noted COST trades at ~34x earnings, which is a hefty premium relative to the market. 

With respect to the economic calendar, it is loaded:

• Powell speaks at 12:20PM on Tuesday.
• FOMC minutes Wednesday.
• GDP Thursday (2nd estimate for Q1).
• PCE Friday. 

While there is a lot more on the docket, I choose to highlight these four as I think they will lead market perception of future FED action.

The Final Shoe to Drop: The E in PE

This is where it pays to be a stock picker. Right now, there are stocks trading at 5-10 year Forward PE (FWD PE) lows. This is because investors have hit the sell button, decreasing the price (“P”), quicker than analysts could revise earnings downward (“E”) in response to the new macro. Numerators on FWD PEs are front-running denominators. When the E’s adjust downward, FWD PEs will jump. If you think the earnings-revised FWD PE will still be below long-standing averages, then you should start dollar cost averaging into those names as they would be undervalued. Furthermore, additional insight on future earnings from the perspective of respected sell-side analysts could provide a little stability for the market. Until sell-side analysts make their opinions known, the market will continue to try to figure it out alone contributing to these massive intraday swings in both individual equities and the broader indices.