Target, off target

Stocks continued their mini rally yesterday after a strong retail sales number painted a picture of healthy consumption. The Fed spoke a lot yesterday – there were hawks and doves – the usual fare.

Careful what you wish for. It felt good to see some green on the screen yesterday, didn’t it? It was like getting the first glimpse of land after being out at sea for a long time…in a storm. But don’t kid yourself, we are still a long way from shore, and storms are prone to grow violent in this type of economy. First, let’s start with some new facts. Yesterday morning, the US Census Bureau announced that Retail Sales had grown by +0.9% in April. The number came in just under economists’ estimates, but March’s number was revised significantly higher to +1.4% from +0.5%. That brings the annual growth number to +8.1%, which, at face value, paints a picture of a strong economy. Strong consumers = strong economy. If we observe the statistics from 1 lens, we can deduce that the consumer is weathering inflation, undaunted by skyrocketing prices. However, a different lens would lead us to conclude that those rising retail sales numbers are higher due to higher prices paid. For example, if we pay +25% more for Twinkies this month but buy -10% less of them, the end results would appear to show that we bought more Twinkies. I know, technically, we spent more on Twinkies, but at some point, consumers may give up purchasing them altogether. A deeper dive may paint a clearer picture. March’s large upward revision to +1.4% excluding gas station retail was only up by +0.6%. April’s +0.9% gain excluding food and motor vehicles was only up by +0.3%. Do I need to remind you that fuel costs, food, and anything related to driving has become significantly more expensive in the past year? Of course, not. Forget that negative lens for a moment and let’s return to the rose-colored, first lens. It is true that, regardless of the math, consumers bought more stuff month over month, so it is fair to say that consumption is still healthy for now. Employment, another indicator of economic strength, is doing quite fine as well, with the rate of unemployment hovering just above the 60-year low achieved just prior to the pandemic. Low unemployment and strong consumption are likely to cause…you guessed it, inflation. In this case, strong economic conditions combined with ongoing supply chain problems, have brought tolerable inflation to intolerable levels, which is why the Fed has been forced to act, er…forcefully. Ok, it is the Fed’s job, and it ultimately has our best interests in mind. Though the journey may be a bit rocky, we will be better off when we get there, kind of like taking bitter medicine. Now, we are expecting the Fed to raise rates by a whole percentage point through July and that they will likely raise it by another +75 basis points by November. The market appears to be OK with that, as long as the Fed doesn’t start raising rates at a faster clip, like +75 basis point moves. Just a few days ago, Fed Boss Powell implied that it won’t happen, which was one of the catalysts for this recent upswing in stocks, however yesterday, he reminded us that the Fed would not hesitate to go big, if the conditions warranted. So, is a +75 basis point hike on the table again? Nobody knows, but stock futures have not taken kindly to Powells flex, dipping slightly overnight. Until we get some proof that inflation is actually receding, like some smaller than expected CPI figures, we can count on the Fed to continue its path of tightening, which ultimately means stocks will continue to bounce around in a trendless manner. By the way, we are expecting another CPI release on June 10^th, prior to June’s FOMC meeting. So, we will just have to wait and see…and continue to hold tight, because we are still far from shore and the clouds on the horizon look ominous.

WHAT’S SHAKIN’

Target Corp (TGT) shares are lower by -21.7% in the premarket after it announced that it missed EPS estimates by -28.52%, though it beat Revenue estimates by +2.02%. The company cited unexpected cost pressures contributed to the slip, specifically higher wages and freight charges. Dividend yield: 1.67%. Potential average analyst target upside:  +26.1%.

Analog Devices Inc (ADI) shares are higher by +1.93% in the premarket after it announced that it beat EPS and Sales estimates by +13.87% and +4.55% respectively. The company, additionally, offered strong forward guidance in ranges that exceed analyst estimates. Dividend yield: 1.85%. Potential average analyst target upside:  +23.5%.

YESTERDAY’S MARKETS

Stocks rallied yesterday after a strong retail figure was released and the Fed pledged to stay the course. The S&P500 rose by +2.02%, the Dow Jones Industrial Average climbed by +1.34%, the Nasdaq Composite Index gained +2.76%, and the Russell 2000 Index added +3.19%. Bonds slipped and 10-year Treasury Note yields gained +10 basis points to 2.98%. Cryptos gained +1.48% and Bitcoin advanced by +0.57%.

NXT UP

• Housing Starts (April) are expected to have slipped by -2.1% after advancing by +0.3% in March.
• Building Permits (April) may have lost -3.0% after gaining +0.3% in March.
• The Fed’s Patrick Harker will speak today.
• After the bell earnings announcements: Bath & Body Works, Synopsis, and Cisco Systems.