Last updated on October 19, 2022
The following is an amended form of the Aug. 15 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack.
Some bad economic news out of China has weighed on risk sentiment overnight. The country’s central bank responded with a surprise rate cut. The impact is mostly limited to commodities so far, with WTI crude oil down 4% and copper off 2% in early Monday trading.
Starting tomorrow (Tuesday), the big box retailers will report earnings, with the likes of Walmart (WMT) and Home Depot (HD) up first. Wednesday we’ll get Lowe’s (LOW), Target (TGT), and TJX (TJX).
The Bottom Line©
The China news is not good. The damage can be seen across all aspects of that country’s economy, from real estate, employment, industrial output, and consumption. From that perspective it is surprising that the damage appears to have been contained to commodities so far. It may be a good time to revisit our primer on Evergrande from almost one year ago. The point is, this is a concern that the market is maybe underestimating at this juncture.
For now maybe investors are focused on retailer earnings. A lot of retailer stocks have been rallying. Morgan Stanley for its part expects more downward earnings revisions this week. Sell-side research can be a good contrarian indicator, but the argument does make sense when you consider how many of these companies have lowered outlooks already. Don’t forget that Walmart warned of inventory buildup a few weeks ago. If anything can break up this rally, it’s bad news from retailers. The U.S. consumer is the major driving force behind the global economy. If Americans start buying less stuff it will be very bad all around.
So that’s a major hurdle we have to cross this week. And with the fresh headlines out of China things could get hairy.