Turbulent Stocks and Tales of the Cash Register

by Shawn Narancich, CFA Vice President of Research

Stocks Hit Turbulence

Investors became disabused of the goldilocks notion that U.S. equities will benefit from both good economic news and bad (the latter being ascribed to what’s known as the Bernanke put), with stock prices succumbing to congressional probing of the Fed Chairman’s testimony this week. Bernanke indicated that the U.S. central bank could begin dialing back its open-ended quantitative easing (QE) program if incoming jobs data evinces sustainably better employment trends. Nothing earth shattering here, but in light of the near uninterrupted 15 percent-plus gains that stocks have experienced so far this year, traders don’t need much of an excuse to take profits. Ultimately, a less accommodating Fed presumes the type of economic improvement and employment gains the Fed wants to see (i.e., good news), an environment supporting corporate profits. With 1.1 percent inflation and 7.5 percent unemployment still materially distant from the Fed’s goals, much work remains to be done. That said, we may be embarking on one of those periods in which the receipt of typically encouraging economic reports are met with skepticism by traders fearful that the Fed will withdraw the proverbial punch bowl of monetary stimulus sooner than expected. Against this backdrop, Treasuries have fallen in value, with the benchmark 10-year security now yielding in excess of 2 percent.

Tales of the Cash Register

Major retailers bookended what was an otherwise uninspiring first quarter earnings season, reporting characteristically disparate results. In the “hit” column, Home Depot confirmed its spot as the nation’s top home improvement retailer, reporting healthy sales gains despite a much cooler spring that delayed lawn and garden spending. The key drivers for Big Orange are continuing gains in new home sales and higher home prices that are making existing homeowners more prone to spend on an appreciating asset. Unlike Home Depot, competitor Lowe’s missed earnings expectations on disappointing same-store sales that fell in the period. As such, Home Depot’s market share gains accelerated and management raised earnings guidance, rewarding shareholders with further gains in a stock that is now up 28 percent year-to-date and 114 percent in the past two years.

Things weren’t so rosy for Target in its fiscal first quarter, as cheap chic retailer reported a disappointing drop in same-store sales and missed earnings expectations. While a cool spring hurt temperature-sensitive apparel sales, management reports that better weather recently has same-store sales back in the “plus” column. The stock was hit by 4 percent on the earnings news, but we remain optimistic that Target will gain its fair share of U.S. retail sales while benefitting from a recent expansion into Canada, where customers have enthusiastically greeted Target’s new stores. As the business gains scale, we believe that Canada will turn profitable later this year and drive attractive earnings accretion in 2014 and beyond.

Our Takeaways from the Week

  •  Stocks stumbled this week as investor focus turned to Fed policy amid increasing speculation about the timing of tighter monetary policy
  • Retailers reported mixed first quarter earnings that marked the unofficial end of reporting season