A few months ago, we wrote the following about WMT’s first quarter earnings: “Walmart is the world’s largest retailer. Accordingly, their results are indicative of the challenging climate facing consumers and many retail-oriented businesses. Personal consumption accounts for two-thirds of GDP.” WMT stock fell 12% on the weak outlook and comments about the fastly deteriorating health of personal consumption.
WMT strikes again. On Monday night, WMT fell about 10% on a warning to its investors. It forecasts operating profits would be lower than expected in the second quarter and throughout 2023 (-13 to -14%, -9% to -11%, respectively). The following line caught our attention and follows their prior warnings: “The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars.”
What To Watch Today
8:30 am Durable goods orders for June, forecast -0.4%, prior 0.8%
8:30 am Core capital equipment orders for June, prior -0.6%
8:30 am Advance report on trade in goods for June, prior -$104.3 billion
10 am Pending home sales index for June, forecast -1.0%, prior 0.7%
2 pm Fed funds target rate forecast 2.25%-2.50%, prior 1.5%-1.75%
2:30 pm Fed Chair Jerome Powell press conference
Market Trading Update – 50-dma Support Holds…Barely.
Yesterday, the market sold off following Walmart’s (WMT) poor earnings announcement, which fueled concerns of an oncoming recession. Today, the FOMC will announce its latest rate decision which is expected to be a 0.75 bps increase and no change to the current trajectory of Quantitative Tightening. While the market remains on a MACD buy signal, as noted yesterday, the lack of progress in the market is eating up that buy signal. As such, the upside for this rally is becoming much more constrained. Continue to trade definitively, raise cash levels, and reduce risk as needed.
If the market can hold the 50-dma and rally above Friday’s highs, then the potential for a further rally becomes clearer. However, a break of the 50-dma will likely signal a retest of recent lows. In either event, the risk/reward tradeoff isn’t great, so holding some extra cash as a hedge makes sense.
Google Misses Earnings
Alphabet reported weaker-than-expected earnings and revenue for the second quarter. The shares are trading higher this morning, suggesting much of the bad news is priced in.
- Earnings per share (EPS): $1.21 vs $1.28 expected, according to Refinitiv
- Revenue: $69.69 billion vs $69.9 billion expected, according to Refinitiv
- YouTube advertising revenue: $7.34 billion vs. $7.52 billion expected, according to StreetAccount
- Google Cloud revenue: $6.28 billion vs. $6.41 billion expected, according to StreetAccount.
- Traffic acquisition costs (TAC): $12.21 billion vs $12.41 billion expected, according to StreetAccount
Microsoft Earnings Miss
Microsoft shares fell 1% in extended trading after the software maker reported fiscal fourth-quarter results that failed to reach Wall Street consensus. Like GOOG, shares are trading higher this morning.
- Earnings: $2.23 per share, adjusted, vs. $2.29 per share as expected by analysts, according to Refinitiv.
- Revenue: $51.87 billion, vs. $52.44 billion as expected by analysts, according to Refinitiv.
Microsoft’s revenue increased by 12% year over year in the quarter, which ended on June 30, compared with 18% growth in the previous quarter. according to a statement. Net income moved up 2% to $16.74 billion.
Inflation at the Ballpark
ESPN recently published How inflation is affecting your wallet at the ballpark concession stand this season. The article details how prices are affecting baseball fans. ESPN’s article opens as follows:
It’s costing more to root, root, root for the home team, especially if you want to pony up for peanuts and Cracker Jack.
The article shares information on the rising costs for vendors and, ultimately, baseball fans. It also discusses the broken supply lines and provides a few examples of what vendors did to supply the stadiums. For example, the CEO of Deleware North, who supplies the Atlanta Braves ballpark, stated the following:
“Our commissary team drove through the night to another [team’s park] whose season had ended … to load up a U-Haul truck and drive back to Atlanta to sell at the game the next night,” Obletz said.
New Home Sales and the Case-Shiller House Price Index
New home sales continue to fall as home buyer affordability plummets due to high mortgage rates and house prices. Despite new and existing home sales falling, house prices are not yet greatly affected. The Case-Shiller House Price Index was up last month by 1.5%, but because it was less than the monthly rate a year ago, the year-over-year rate fell slightly to 20.5%. While the index is starting to peak, the decline is minor. Given that housing/rent costs contribute about a third to CPI, high inflation rates may stay persistent longer than the Fed would like.
Summer Market Doldrums
The graph below from Topdowncharts.com shows that based on seasonal patterns, we should expect the S&P 500 to be relatively flat for the next few months. While flat returns would argue for less volatility, the data argue the VIX will pick up into late October. Given the current situation with inflation, the Fed, and weakening economic growth, we suspect volatility will stay high for the foreseeable future. Such does not necessarily mean stocks will decline. But, it potentially presents opportunities to hedge with volatility when it gets to the lower end of its recent range.
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