CWS Market Review – November 22, 2019

“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” – Bertrand Russell

So true, Berty. Consider this scenario: If someone told you that come November, there would be impeachment hearings in Congress, and violent street demonstrations in Chile, Iran and Hong Kong, what would the stock market be doing?

Well, we know that answer. It’s as calm as ever. In fact, the S&P 500 has made several new all-time highs recently. The stock market has once again entered one of its somnolent rally phases.

Here are some facts. In the 19 trading days ending on Monday, the S&P 500 closed higher 15 times. Many of those daily gains were tiny. In fact, the 20th day was broken by a decline of just 0.05%. The S&P 500 hasn’t had a daily drop of more than 0.4% in six weeks. In 10 of the last 13 days, the S&P 500 has closed, up or down, by less than 0.28%. Compare that to August when it happened just four times in 22 days.

In this week’s issue of CWS Market Review, I’ll discuss Jay Powell’s apparent victory over the bond market. I’ll also cover the strong earnings report we just got from Ross Stores. Plus, we have upcoming earnings from Hormel and Smucker. But first, let’s take a closer look at how the Federal Reserve has prevailed against the doubters.

Jay Powell Faced the Bond Market and Won

On Wednesday, the Federal Reserve released the minutes of its most recent meeting. This was the meeting where the Fed decided to cut interest rates. That was its third rate cut in three months.

First, I have to explain that reading the Fed’s minutes involves taking a deep dive into the artful use of indefinite pronouns. The minutes never say who said what. Rather, we’re told that “many” said this, or “several” countered that. “Some” and “a few” make frequent appearances as well.

These last minutes were important because they suggested that the Fed may be done with cutting interest rates. If so, that’s very good news. It also is a big victory for the Fed, and particularly for Fed Chairman Jay Powell.

Last year, the Fed had been consistently hiking rates, but gradually this year, the market started to call for rate cuts. As I’ve pointed out before, the two-year Treasury is a good proxy for Fed policy. As a very general rule, the central bank doesn’t like to get too far from the two-year yield. As that yield started to plunge, the Fed had to act.

This meant that the Fed had to withstand a lot of criticism, especially from President Trump. Still, despite what the president said (and tweeted), he couldn’t do anything to stop them. There were also many doubters on Wall Street. I know a lot of folks were expecting several more rate cuts. We were told that the Fed would be out of bullets by the time of a real emergency. However, Powell consistently said that these were “mid-cycle adjustments.”

The Fed was also able to do something that large organizations have a tough time doing: it admitted it made a mistake. Mind you, the Fed never came out and said so, but its actions certainly suggest that its last few hikes were wrong.

Now here we are a few weeks later, and the bond market has chilled out. The yield curve is no longer inverted. The stock market has made several new highs, and volatility is quite low. The Fed meets again in December, and the market doesn’t foresee any change to interest rates. At least, not for another eight months, and even at that point, it’s barely in favor of a rate cut.

To show you how much things have changed, here’s the bent-up yield curve from August 28 (blue) and the more normal one from November 21 (red).

We’re also seeing better news from the housing market. At this time last year, new-home sales dropped sharply, but this week’s report was quite good. This is key for the Fed. Housing is important for the economy, but the Fed has an indirect hand over the industry when it moves interest rates. The difficulty is that there tends to be a lag time.

This week, Freddie Mac said that the 30-year fixed-rate average fell to 3.66%. That’s a six-week low. A year ago, it was at 4.81%. That bodes well for housing and construction-related stocks. For example, Sherwin-Williams (SHW) made another new high last week. It’s a 44% winner for us this year.

Now let’s look at the big earnings beat we got from Ross Stores.

Ross Stores Beats and Guides Higher

After the bell on Thursday, Ross Stores (ROST) reported fiscal Q3 earnings of $1.03 per share. That easily beat the company’s own forecast range of 92 to 96 cents per share. Ross always gives low guidance and most always beats it.

Quarterly sales were up 8%, but the really impressive stat was comparable-store sales. For Q3, that was up 5%. That’s very good. The company had been expecting a gain of 1% to 2%.

Barbara Rentler, Chief Executive Officer, commented, “We are pleased that our third-quarter results were ahead of expectations. Operating margin of 12.4% was also above-plan mainly due to better-than-expected sales and merchandise margin.

Looking ahead, Ms. Rentler said, “As we enter this year’s holiday season, we are up against multiple years of strong comparable-store sales gains. In addition, we expect another fiercely competitive retail landscape, along with ongoing uncertainty surrounding the macroeconomic and political environment. As such, while we hope to do better, we continue to project fourth-quarter comparable-store sales gains of 1% to 2%, versus a 4% increase last year.”

I like that operating-margin number. Again, Ross almost always says it sees comparable-store sales growth of 1% to 2%. I’m pretty confident that they can top that. Remember that Q4 is the biggie for Ross. That covers November, December and January.

Ross now expects Q4 earnings of $1.20 to $1.25 per share which includes a tax benefit of two cents per share. So Ross is keeping its Q4 guidance the same, but it effectively is higher guidance because it incorporates the beat for Q3. Before, Ross expected earnings this year of $4.41 to $4.50 per share. Now they see earnings of $4.52 to $4.57 per share. That’s up from $4.26 per share last year.

This was a very good quarter for Ross. I’m raising our Buy Below to $118 per share.

Earnings Preview for Smucker and Hormel

We have two more earnings reports this month. This is for companies with quarters that ended in October.

JM Smucker (SJM) is due to report later today. The last earnings report was a dud. For the August quarter, comparable net sales fell 4%, and earnings fell 11% to $1.58 per share. That was 16 cents below expectations.

What went wrong? The company was hurt by poor sales in its pet-foods business. Smucker owns Milk Bone and Meow Mix. In recent years, the company has been working to build up this business. That’s why they bought Ainsworth, but the competition has been stronger than they thought. Management has conceded the difficulties in this sector. Smucker’s coffee business was weak last quarter as well.

Previously, the company was expecting sales to rise by 1% to 2%. Now they expect sales to be flat to -1%. Smucker had been expecting full-year earnings of $8.45 to $8.65 per share. Now they see earnings of $8.35 to $8.55 per share. Wall Street expects fiscal Q2 earnings of $2.13 per share.

Hormel Foods (HRL) is due to report on Tuesday, November 26. This will be for their fiscal Q4. Like Smucker, this has been a tough year for Hormel. In May, the Spam people lowered their full-year guidance due to African swine fever and other issues. I think that rattled investors.

The August earnings report was a relief, and Hormel stood by its full-year forecast for earnings of $1.71 to $1.85 per share. Since Hormel has already earned $1.33 through the first three quarters, the guidance implies a range for fiscal Q4 of 38 to 52 cents per share. Hormel also sees full-year sales of $9.5 billion to $10 billion. Wall Street expects 46 cents per share.

After that, we only have one more earnings report this year. FactSet (FDS) is due to report on December 19. RPM International (RPM) has a November quarter, but it will report earnings in early January. Soon after that, Q4 earnings seasons will begin.

That’s all for now. There will be no newsletter next week. I’m taking my traditional Thanksgiving break. The U.S. stock market will be closed on Thursday for Thanksgiving, and it will close at 1 p.m. on Friday, November 29. On Wednesday, the government will update its report on Q3 GDP. The initial report showed growth of 1.9%. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on November 22nd, 2019 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.