JPMorgan underwhelms but Wells Fargo excites investors

Stocks had a mixed close on Friday as earnings season kicked off with the big banks… and markets were unimpressed. Retail sales slumped in December catching economists by surprise and flashing warning signals for the economy.

It was the best of times, it was the… well, you know.  If you don’t know, it is a fragment of the oft quoted opening line from A Tale of Two Cities by Charles Dickens. The quote is apt for the markets and the economy of late. The economy is racing higher, unemployment is slowing, and despite the OMICRON surge, things are slowly, slowly heading back toward normal. Just last week, I watched a group of teenagers and twenty somethings lined up in freezing temperatures, WITHOUT COATS, all for the right to purchase some extremely expensive cookies. I thought “hmm, things must be looking up for retail”… for designer cookies, at least. Last Friday, the US Census Bureau released its Retail Sales figure for December and it missed estimates, falling by -1.91% after climbing by a scant +0.2% in November. Not exactly great numbers for the much-heralded holiday season. Analysts are suggesting that the dip was a result of consumers purchasing gifts earlier than normal along with… wait for it... supply-chain-related inventory problems. That implies that if I walked into a sporting goods store hoping to buy, say, a tennis racket as a gift, finding that the one I wanted was out of stock because “you know… supply chain problems,” that I would simply not buy a gift for my daughter. Let’s take a closer look at the number and see where the biggest changes occurred.  The biggest decline (-8.7%) came from Non-store Retailers, AKA online shopping. Larger declines also occurred in Department Stores (-7.0%), Sporting Goods (-4.3%), and Home Furnishings (-5.5%). A big area of concern, Food Services and Drinking Places, only declined by -0.83%, which is reassuring considering the recent OMICRON surge was already in full swing in December.  Before we go on getting all out of sorts, it is important to note that, despite the pullback, retail sales, in aggregate, are at lofty levels. By lofty,I mean near all time highs since the number began to be followed. In fact, the $626.833 billion spent on retail is far greater than the $525.81 billion spent just prior to the pandemic… that’s almost a +20% growth in case you were wondering. It took 22 months for that growth, while a similar rise prior to the pandemic took some 61 months. Looking further back, you will not find a period of such steep growth as we have seen in the past 22 months. So, it is fair to say that these are, indeed, the “best of times” for retail, and it should not come as a surprise, considering the massive amount of Federal stimulus funds that were pumped into consumers’ pockets in 2020. The downside of all that mad buying is… inflation.  Inflation has clearly been top-of-mind for consumers as price hikes are very real and now quite obvious at check-out time. Inflation is also top-of-mind for markets, which are now dealing with the prospect of a series of aggressive, inflation fighting, rate hikes and liquidity pullbacks.  Expected higher rates have impeded stock market growth in general and, more acutely, growth and technology stocks. While stock market volatility is disconcerting, it can hardly be considered the “worst of times,” with indexes near all-time highs.  It is clear that the economy, the markets, and even we consumers are searching for that balance between the great rewards of strong growth and the costs associated with it. That balance will not occur overnight, but it will eventually, and this “winter of despair” will ultimately lead to a true “spring of hope.” My apologies to Mr. Dickens, for completely corrupting his eternal words.

MOVERS ‘N SHAKERS

JPMorgan Chase & Co (JPM) topped the loser board on Friday, declining by -6.15% after a disappointing earnings announcement. Though the bank beat on both earnings and revenues, the earnings beat was attributed to its releasing of $1.8 billion on loan loss reserves. Dividend yield: 2.53%. Potential average analyst target upside: +10.6%.

Wells Fargo & Co (WFC) rose by +3.68% on Friday after beating on EPS and Revenues by +33.47% and +10.62% respectively. In the past month 68% of analysts have changed their price targets, 17 up and 8 unchanged. Dividend yield: 1.38%. Potential average analyst target upside: +3.9%.

Devon Energy (DVN) shares are higher by +1.92% in pre-market after Barclays raised its price target yesterday. Crude oil futures are also trading higher by +1.30%, helping the cause. Dividend yield: 6.67 %. Potential average analyst target upside: +5.7%.

The Gap Inc (GPS)shares are trading lower by -5.53% in the pre-market after Morgan Stanley downgraded the stock to UNDERWEIGHT/CAUTIOUS due to expected challenges to soft line retailers. Dividend yield: 2.63%. Potential average analyst target upside: +23.4%.

FRIDAY’S MARKETS

Stocks had a mixed close as earnings dribbled in, and Retail Sales printed a big miss. The S&P500 rose by +0.08%, the Dow Jones Industrial Average fell by -0.56%, the Nasdaq Composite Index climbed by +0.59%, the Russell 2000 Index added +0.14%, and the S&P500 ESG Index traded higher by +0.11%. Bonds slipped and 10-year Treasury yields gained +8 basis points to 1.78%. Cryptos climbed by +1.80% and Bitcoin traded higher by +1.15%.

NXT UP

• Empire Manufacturing (Jan) is expected to come in at 25.0, down from last month’s 31.9 reading.
• NAHB Housing Market Index (Jan) may have remained unchanged at 84.
• This morning, Signature Bank beat on both EPS and Revenues, Truist and PNC Financial Services beat on EPS and missed on Revenues, while Goldman Sachs and Bank of NY both missed on EPS but beat on revenues.
• More earnings along with housing numbers, Philadelphia Fed Business Outlook, and the Leading Economic Index. Please refer to the attached earnings and economic release calendars for times and details.