Eric Kuby, Chief Investment Officer, will be interviewed on TD Ameritrade Network’s The Watch List hosted by Nicole Petallides. To hear North Star’s thoughts on market pessimism as well as our bargain stock picks, tune into the link below at 1:30 PM CT/2:30 PM ET.
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Dollar Highs and Consumer Lows
“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time.”
That sentence from Brian Cornell, Chairman and Chief Executive Officer of Target Corporation, provides a snapshot of the 2022 landscape for many companies. The reaction of investors to that news, sending the share price down over 25% in one day, captures the current jittery tone of the market. Prior to Target’s earning release Wednesday morning, the market was actually enjoying gains of over 1.5% for the week. The S&P nosedived almost 7% from that level before a wild rally during the last 45 minutes of trading on Friday afternoon softened the pain. For the week, the Dow Jones average lost 2.9% for its first eight-week losing streak since 1923, while the S&P lost 3% for the week and the Nasdaq slumped 3.8%, with both posting seven-week losing streaks. Small caps mercifully absorbed a smaller loss of 1.1%. There have only been three other times when the S&P 500 has declined seven weeks in a row and following those declines the average gain was 39%. Additionally, declining issues only modestly outnumbered advancing issues, perhaps indicating some underlying support in the market. Consumer stocks were the worst performers, with the Consumer Goods sector sinking -7.2% and Consumer Services -6.3%. Five of the ten sectors posted gains, led by Telecommunication with a 2.2% rise. Meanwhile the yield on the 10-year Treasury fell for the second week in a row, finishing down 14 basis points to 2.79%. The dollar retreated 1.4% after reaching a multi-decade high, while gold advanced 2%, and crude oil gained 2.6%. The spread between the 10-year and 2-year Treasury rates narrowed to 18 basis points, once again ringing the recession alarm bell for some forecasters.
The economic data was mixed, with the National Association of Home Builders/Wells Fargo housing market index falling to 69 from 77 in April, its lowest point since June 2020, and marking its fifth straight month of declines. On a more positive note, industrial production rose 1.1% in April, well above the 0.5% Dow Jones estimate, according to Fed data. Capacity utilization, or the level of potential output being realized, increased to 79%, slightly ahead of the 78.6% estimate. It is also worth noting that despite the rampant pessimism, consumers kept spending in April, with retail sales rising 0.9% overall. That number is not adjusted for inflation, so it is indicative both of sustained spending and higher prices.
Turning back to the Target tantrum, there are some important takeaways beneath the headlines. On the cost side, surging freight costs were the primary cause of the miscalculation, with those costs now forecasted to be $1 billion higher for 2022 than anticipated just a few months ago during their investor day presentation. Consumers also shifted their buying behavior away from some categories, such as kitchen appliances and electronics, towards soft goods, such as beauty and food, leading Target to markdown the former items. The company believes that whereas these issues will certainly continue to affect the next quarter’s earnings, that the target (pun intended) long-term operating margins of 8% remain in place.
Russia’s invasion of Ukraine and the Covid-19 outbreak in China were the two unforeseen events that derailed the widely accepted reopening recovery narrative from two months ago. While the war wages on without any reasonable timetable for resolution, there are some positive signs from China as Shanghai pushed ahead with plans to restore part of its transport network in a major step towards exiting its COVID-19 lockdown.
Slow and Steady
The economic calendar is light, with the FOMC minutes from its May meeting scheduled to be released on Wednesday likely to be carefully dissected for any monetary policy nuances. The other releases, New Home Sales, Durable Goods, and Personal Income and Expenditures are all expected to show a slow and steady economy.
Stocks on the Move
-29.3% Target Corporation (TGT) operates general merchandise discount stores. The Company focuses on merchandising operations which includes general merchandise and food discount stores and a fully integrated online business. Target also offers credit to qualified applicants through its branded proprietary credit cards. TGT plummeted last week as earnings reflected higher costs squeezing profits.
-17.9% Boot Barn Holdings Inc (BOOT) sells western and work gear for individuals and families. The Company sells boots, jeans, shirts, hats, belts, jewelry, and other accessories. BOOT was down in sympathy with Target last week despite an earnings beat with long term guidance outlining an expanded total addressable market, a goal of 900 store locations, and merchandise margin expansion due to better full price selling and exclusive brand penetration.
-13.1% The JM Smucker Company (SJM) manufactures and markets food products on a worldwide basis. The Company’s principal product portfolio includes Folgers Coffee, Jif, Milk-Bone, and new favorites like Café Bustelo and Rachael Ray Nutrish. The household products stock was down as consumer demand indicators suggested a slight softening.
+15.1% Paramount Global (PARA) operates as a multimedia company. The Company provides television and radio stations, produces and syndicates television programs, broadcasting, publishes books, and online content, as well as provides outdoor advertising. PARA jumped last week after Warren Buffett’s Berkshire Hathaway disclosed a new 68.9M share position.
-11.7% 1-800-Flowers.Com Inc (FLWS) is an e-commerce provider of floral products and gifts. The Company’s product offerings include fresh-cut and seasonal flowers, plants, floral arrangements, home and garden merchandise, and gift baskets. The retail stock was down as consumer demand indicators suggested a slight softening.
-10.3% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels. There gaming company was down as consumer demand indicators suggested a slight softening.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.