S&P 500 posts gain on strong retail earnings, retail sales data

Bubbles are brutal…they force us to decide to either look like an idiot before the crash, or look like an idiot after it. – John Hussman, American economist and hedge fund manager

The S&P 500 Index resumed its upward climb last week with modest gains and closed at an all-time high as retail sales data was strong and quarterly earnings from major retailers were all better than expected. The technology-laden Nasdaq Composite Index also rose and ended the week at a record high while the Dow Jones Industrial Average fell more than one percent as Boeing and Goldman Sachs weighed on the 30-stock average. Retails sales in October rose by nearly double the increase in September and were much better than forecast as online shopping posted the biggest relative gain for the month and was more than 10% higher than a year ago. The retail sales data showed that consumers are willing to pay the higher prices despite consumer sentiment being at its lowest level in 10 years.  On the earnings front for the major retailers, the news was equally impressive. Walmart began the earnings parade on Tuesday with results that topped expectations on both the top and bottom lines as U.S. same-store sales rose nearly 10% and the company raised its earnings forecast for 2021. Home Depot and Lowe’s followed with revenue and earnings results that easily beat analysts’ estimates as both companies benefited from a strong housing market. While big box retailer Target also exceeded expectations, the company warned that rising costs could affect its bottom line in the future as it plans to absorb these costs rather than pass them onto the customer. Finally, department stores Macy’s and Kohl’s also handily topped both revenue and earnings estimates with Macy’s same-store sales surging over 35%.  So far companies have been able to weather the supply chain disruptions and inflation headwinds and report earnings that have been very strong. About 95% of the companies in the S&P 500 have reported third quarter earnings and 81% of them have topped estimates.

Last Week

October leading economic indicators increased nearly 1% after only a modest increase in September, suggesting the current economic expansion will continue in 2022. Weekly jobless claims contributed to the positive sentiment as they fell slightly to 268,000, the lowest level since March 2020 and the seventh straight weekly decline. Housing starts in October, however, dropped by more than forecast as supply chain issues continue to plague the building industry. Import prices in October were also much higher than estimates and rose at the fastest pace since May.

For the week, the Dow Jones Industrial Average fell 1.4% to close at 35,601 while the S&P 500 Index rose 0.3% to close at 4,697. The Nasdaq Composite Index jumped 1.2% to close at 16,057.

This Week

The second estimate of third quarter gross domestic product (GDP) is expected to be revised slightly higher from 2% to 2.2% and October durable goods orders are forecast to rise modestly in line with gains posted in September. Both new and existing home sales in October are expected to be less than in September as supply chain disruptions continue to hamper activity, especially at the lower-price end of the market. The final November University of Michigan consumer sentiment index is forecast to be the same and at the lowest level in 10 years. The Federal Open Market Committee (FOMC) releases minutes from its November monetary policy meeting.

The markets will be closed on Thursday in observance of Thanksgiving and will close early on Black Friday, one of the busiest shopping days of the year.

Among the most notable companies scheduled to report quarterly earnings this week are HP Inc., Dell Technologies, Agilent Technologies, Zoom Video Communications, Analog Devices, Autodesk, Urban Outfitters, Best Buy, Burlington Stores, Dick’s Sporting Goods, Gap, Nordstrom, J.M. Smucker, Deere and Medtronic.

Portfolio Strategy

After a mixed performance for the major stock averages last week, the stock market should perform well in Thanksgiving week if history is a guide. Since 1950, the last five trading days of November are typically positive but following a strong October that saw stocks soar over 9% from their low during the month, the market may be due for a breather and consolidate those gains. With third quarter earnings season winding down, the most important release this week could be the personal consumption expenditures (PCE) index, which is the preferred measure of inflation for the Federal Reserve. Inflation has been running at a 30-year high and the core PCE index, which excludes the volatile food and energy components, was up 3.6% in September on a year-over-year basis. The core PCE index is expected to jump again in October, resulting in an increase of 4.1% over last year. This piece of data comes at a time when the final November reading of the University of Michigan consumer sentiment index is also released this week and is expected to be at the lowest level in 10 years due mostly to the recent spike in inflation. But it’s important to pay attention to what consumers actually do rather than what they say as October retail sales data was particularly strong and quarterly earnings from the country’s major retailers were much better than expected. Economic momentum seems to be improving and that bodes well for strong holiday shopping season and additional gains for the stock market heading into year-end.