Wednesday, August 22, 2018

Mixed markets after Fed minutes and strong earnings

Dow fell 88, advancers just ahead of decliners & NAZ added 29.  The MLP index rose 3+ to 291 & the REIT index pulled back to 361 following recent strength.  Junk bond funds continued weak & Treasuries went higher.  Oil jumped up 2+ to almost 68 & gold gained 2 to 1202.

AMJ (Alerian MLP Index tracking fund)

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US central bankers discussed raising interest rates soon to counter excessive economic strength but also examined how global trade disputes could batter businesses and households, minutes of the Federal Reserve's last policy meeting showed.  The Fed has been raising rates gradually since 2015 & policymakers are now concerned the economy is so strong that inflation could rise persistently above the central bank's 2% target.  Fed officials at the Jul 31-Aug 1 policy meeting held rates steady, but their discussion left clear they are considering another rate hike soon.  The Fed has raised rates twice this year.  Policymakers generally noted that spending by households & businesses appeared to have “considerable momentum.”  Fed officials also generally expected the economy would grow at a fast enough rate to put upward pressure on inflation, which recently has come close to the central bank's target.  With interest rates rising, many policymakers said the Fed would soon have to stop describing monetary policy as a giving a boost to the economy.  At the same time, policymakers held an ample discussion about the risks to the economy from simmering trade tensions.  The Trump administration has raised tariffs on imports from a range of countries, including China & members of the EU, triggering retaliatory tariffs on US exports.  The discussion outlined the tough situation the Fed could find itself in should the trade disputes worsen, with US businesses potentially needing to scale back hiring & consumers possibly facing higher prices on imports.  The Fed is tasked by law with fostering full employment & steady prices.  “All participants pointed to ongoing trade disputes as an important source of uncertainty and risks,” according to the minutes.  Policymakers pointed out that a large prolonged trade dispute could likely hit business sentiment, investment spending & employment.  Wide-ranging tariff increases, however, would reduce the purchasing power of households.  The minutes also gave an indication the Fed was preparing to debate once again how best to implement its monetary policy.  Fed Chairman Jerome Powell said this discussion would likely take place “in the fall.”

Federal Reserve signals September interest rate hike

Chief White House economic advisor Larry Kudlow said that a thriving economy is allowing markets to continue to perform well amid the barrage of seemingly damaging political headlines.  The bull market set history this week when it eclipsed the S&P 500's all-time high.  That came even amid more headaches for the White House.  Paul Manafort, Pres Trump's one-time campaign manager, was found guilty on multiple fraud counts, while longtime Trump lawyer Michael Cohen admitted to tax fraud & making an illegal campaign contribution.  Thru it all, & thru continuing worries about a global trade war & an assortment of other controversies surrounding the pres, the markets have persevered & even climbed into the green today.  Kudlow said a thriving economy is overcoming those issues.  "The economy's everything when it comes to markets and confidence, and I think that markets frankly look through all these various political issues," he said.  "There's no change in policy coming, that's what really matters. Keep your eye on the ball, and I think the markets have done a good job."  GDP grew at a 4.1% pace in Q2 & the Atlanta Fed is forecasting 4.3% growth in Q3.  Unemployment is at 3.9%, around the lowest since 1969, & business & consumer confidence remain high.

Kudlow on why the stock market is ignoring Cohen, Manafort news: 'The economy's everything'

Consumer spending is back & has never been better as far as Target (TGT), a Dividend Aristocrat, CEO Brian Cornell is concerned.  "There's no doubt that, like others, we're currently benefiting from a very strong consumer environment — perhaps the strongest I've seen in my career," Cornell said.  Its shares are surging after reporting fiscal Q2 results that beat on earnings, revenue & comparable store sales. Just when many investors have written off brick-and-mortar retailers, TGT is seeing a huge jump in foot traffic.  "We're seeing a great consumer response ... unprecedented traffic. As we go back and look, we've never seen traffic growth like this," Cornell said.  The big-box retailer also said digital sales skyrocketed more than 40% during Q2, as it's been investing in adding more items to its website and adding more delivery options for online orders.  Building on that momentum, the company raised its earnings outlook for the full year.  TGT has been focused on reinvesting in its business ever since it laid out a strategy at the start of last year to pour $7B into expanding its e-commerce platform, bulking up its lineup of in-house brands, opening new small-format stores & remodeling existing locations.  Cornell said those investments appear to be paying off, with TGT reporting its strongest same-store sales growth in 13 years.  "On any given day, 90 percent of retail sales are done in physical stores," the CEO said.  "I think what you're seeing right now from a macro basis is well-run retailers with strong balance sheets that generate cash ... are winning right now," Cornell added.  "And there's obviously others right now that can't afford to invest in their store experience, or build capabilities or drive differentiation. And they're giving up share. So there's clearly winners and losers. We certainly think we're migrating to the winners column."  The stock rose 2.67.
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Target CEO raves about the US economy: This is the best consumer environment I've ever seen

Lowe's (LOW) reported Q2 adjusted EPS of $2.07, topping the estimate for $2.02.  Revenue of $20.9B, also beat the estimate for $20.77B & same-store sales rose 5.2%, missing estimates.  The company plans to close all 99 of its Orchard Supply Hardware stores (located in California, Florida & Oregon).  The company expects sales to grow at about 4.5% for fiscal 2018 & sales at stores open at least a year at about 3%.  It had previously forecast full-year total sales to increase at about 5% & sames-store sales at about 3.5%.  "We posted solid results this quarter by capitalizing on delayed spring demand," commented CEO Marvin R. Ellison.  "We are committed to driving even stronger performance in the future by sharpening our focus on retail fundamentals and by limiting any projects and initiatives that take us away from our core mission of being a great omni-channel home improvement retailer."  The home improvement retailer reported adjusted EPS of $1.57 in the year ago qtr on $19.5B in revenue.  Q1 results fell flat as an extended winter cut into sales The stock shot up 5.78.
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Lowe's 2Q earnings top expectations

The political goings on in DC are exciting for some, but the bulls are paying more attention to economic data & earnings which are getting good grades by traders.  Trade difficulties remain in place, even though they are not getting a lot of attention.  Maybe after the Labor holiday.  In the meantime, buyers who listen to Larry Kudlow are feeling pretty good.

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