Stocks moved lower again on Wednesday, making for a two-day losing streak as weaker-than-expected guidance from Wal-Mart Inc. (NYSE:WMT) and a disappointing retail sales report called into question the health of the consumer, casting further doubt on the health of corporate earnings as the third-quarter reporting season rolls on.
As a result, significant technical support levels were taken out by large-cap stocks while small-cap stocks have seemingly confirmed a scary looking medium-term downtrend pattern. If the bulls don’t step in right here, right now, we could be looking at a revisit of the late September lows.
In the end, the Dow Jones Industrial Average lost 0.9%, the S&P 500 shed 0.5%, the Nasdaq Composite dropped 0.3% and the Russell 2000 slid 1% to finish the day. The U.S. Dollar came under pressure, gold gained 1.2% and crude oil fell 0.1% to $46.60 a barrel.
WMT fell 10% to close at $60.03, nearing the $60-a-share threshold last crossed in 2012, after management guided fiscal 2016 sales as flatlining with fiscal 2017 earnings per share declining 6% to 12% despite the approval of a $20 billion share repurchasing program worth 10% of its market capitalization. The problem is rising wages: 75% of the earnings reduction is due to wage increases.
Fiscal 2016 earnings per share was reiterated at between $4.40 and $4.70 vs the $4.52 analysts are expecting.
No surprise then that consumer stocks, both discretionary and staples, were the day’s laggards falling 1% and 1.1% respectively. The initial batch of financial sector earnings received a mixed reception, with Bank of America (NYSE:BAC) adding 0.8% after reporting inline results thanks to better trading revenue, expense control, and core net interest margins.
But JPMorgan (NYSE:JPM) fell 2.5% on an earnings per share beat after management pooh-poohed Q4 expectations as too high. Wells Fargo (NYSE:WFC) lost 0.7% on a drop in residential mortgage origination.
After the close, Netflix (NASDAQ:NFLX) was trading down 6.9% in after-hours trading, reporting weaker-than-expected subscriber growth on payment issues related to the rollout of chip-secured credit and debt cards. Domestic streaming subscribers increased 0.88 million vs. 0.9 million last quarter and the 1.15 million that was expected. Operating margins were also soft at 4.2% vs. the 7.8% that was expected.
On the economic front, it was all about evidence of slowing demand. Headline producer price inflation sank into negative territory in September for the first time since April on a monthly basis; the year-over-year rate posted its eight consecutive month in negative territory. The headline number was dragged down by a 5.9% drop in energy prices and a 0.8% drop in food prices.
Also, the September retail sales report was weaker than expected with total sales less autos down 0.3% month-over-month. But when removing the impact of automobiles and gasoline as well as building materials, Philippa Dunne of the Liscio Report notes that the 9-month, year-to-date change is a healthier looking 4% gain.
Still, the overall impression is of an economy that’s shifted down a gear; lessening the justification of any interest rate hikes from the Federal Reserve this year. In fact, the day’s data has lessened the futures market odds of a March 2016 rate hike to what’s essentially now a coin toss. The odds of a December rate hike are now less than one-in-three.
No surprise then that investors are piling back into precious metals as everyone realizes the Fed isn’t likely to move on policy tightening until higher inflation is staring them in the face. As a result, the Gold Trust SPDR (NYSEARCA:GLD) surged 1.7% to move above its 200-day moving average for the first time since May — and hasn’t enjoyed a sustained move above this level since January.
That boosted the ProShares Ultra Gold (NYSEARCA:UGL) position recommended to Edge subscribers to a 5.4% gain since recommended on Oct. 9. It also boosted the Market Vector Gold Miners ETF (NYSEARCA:GDX) recommended the same day by 6.5%. I expect these runs to continue as the Fed is forced to admit that while its labor market mandate is nearing fulfillment; it remains well below its 2% inflation target as global economic weakness hits home.
This should also translate into support for the stock market as the Russell 2000 reaches a critical “do-or-die” decision: Either it blasts up and over its September resistance or succumbs to the downtrend pattern in place since June with a retest of last month’s lows.
My guess: Dovish commentary from the Federal Reserve and other global central banks ignites a multi-month rally led by recent laggards in areas like industrials, energy, materials and precious metals.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.
