Retail Earnings in Focus & The Market Looks Cheap Excluding Large Caps

Market Musings

Our current forecast is that the prolonged period of elevated interest rates will eventually lead to a decline in economic activity, which in turn would allow central banks to reduce interest rates without stoking inflation. Our view is that this would result in a soft landing rather than a hard landing.

Improved growth forecasts and declining inflation next year are expected to counterbalance the high valuations seen in stocks. We recommend that investors look beyond US Mega-cap Tech and take advantage of commodities, equities, and credit options that offer better returns than cash. The stock market only looks expensive because of the highly valued mega-caps. Small and Mid-Cap valuations actually look very reasonable.

As we watch the effects of prolonged higher interest rates on some economies outside the US, emerging markets remain vulnerable, while bonds may provide a good hedge against rate shocks.

The latest jobs report (11/3/2023) showed an increase in the unemployment rate, rising to 3.9% from a recent low of 3.4%. The Institute of Supply Management's surveys for both manufacturing and services have indicated a decline in activity.

However, The U.S. economy has demonstrated impressive resilience since the start of the year, largely due to three key factors.

• Consumer spending has continued to grow despite the tightening of credit conditions, boosting employment and payroll numbers to record highs.
• Companies are allocating more of their capital spending budgets to technology hardware and software to boost their productivity, while Federal government spending is rising rapidly due to outlays on net interest paid.
• Refinancing of debts by households and small businesses at record-low interest rates has also helped to keep spending levels up.

Week in Review

U.S. stock markets rose modestly last week, extending the strong gains from the previous week. The Nasdaq Composite Index posted a gain of 2%, while the S&P 500 rose by 1%. The Dow Jones Industrial Average eked out a small gain.

Meanwhile, oil prices continued to drop over the past three weeks, with U.S. crude hitting its lowest level since mid-July. On Friday, it was trading at around $77 per barrel, down from roughly $89 a few weeks ago.

Bitcoin made a comeback, hitting its highest price since May 2022 (many of my readers know I’m not a fan). Bitcoin was trading at above $37,000 on Friday, more than double its year-end 2022 value of less than $17,000.

Trade Desk (TTD) reported earnings last week and disappointed, but we felt the sell off was overdone. So, we took the opportunity to add more in appropriate client accounts. They are an ad distributor on streaming platforms and guidance for the next quarter came in light was the primary driver of weakness. We believe these trends are temporary and that streaming ad growth is secular.

Economic & Earnings Calendar

Next week will be a busy one, with the retailers' earnings in focus, October inflation data and budget wrangling in Congress all in the headlines.

Tyson Foods and Home Depot will begin the earnings season, followed by Cisco Systems, Target, and TJX Cos. on Wednesday and Alibaba Group Holding and Walmart on Thursday.

Portfolio name, Palo Alto Networks (PANW), reports earnings next week and options imply the stock will move over 9% next week. Why do we own it?

Tuesday's consumer price index (CPI) report will be the economic highlight of the week. We will also get retail sales data. Weaker retail sales and a light read on inflation would likely be a positive for the markets. Inflation is expected to come in at a meager 0.07% monthly rate.

Friday is the deadline to avoid a government shutdown, setting the stage for a week of high stakes. We expect the can to be kicked down the road.

Chart of the Week: Historically, a peak in US large-cap market concentration has preceded sustained small-cap outperformance.

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.