Stocks Rise but Yields Remain Low

I mentioned in yesterday’s Chart Advisor that, despite many headlines to the contrary, retail sales are still looking very good in the United States. Spending naturally ebbs and flows, but the U.S. consumer still seems relatively strong. I also said that we could get some good confirmation for that assumption from Walmart Inc.’s (WMT) earnings report this morning.

Walmart reported that total sales were up in the first quarter, and same-store sales were up 3.4% on a year-over-year basis. The company is a good proxy for consumer behavior because of its dominant position across the country and is especially sensitive to inflation issues or a weakening job market.

Some of Walmart’s positive performance is the result of growth in online sales including delivery and pickup features from physical locations. This has allowed the company to encroach further into other retailers’ market share, but it’s not significant enough to hide a lack of growth or significant weakness among consumers. I think this is solid confirmation that consumer spending is still supportive for economic growth in the U.S.

As you can see in the following chart, Walmart stock bounced up off its $100 pivot support level following its release. In my view, one of the negatives in the report (declining operating income) will increase the odds that the stock stops at resistance near $104 per share. Walmart’s report was representative of what we have seen a lot this earnings season; top-line sales are rising, but profitability growth has started to ebb.

The S&P 500 continued its bounce off support near 2,820 and recovered all of Monday’s losses, which shouldn’t be much of a surprise if we look at history. There have been 72 days since the bull market began in 2009 that the S&P 500 has dropped 2% or more. Nearly 72% of the time, the market is higher 30 days following those declines than it was on the day of the drop.

Although I have a generally bullish bias, there are enough unknowns to warrant some caution as the S&P 500 approaches the resistance level of its prior highs near 2,940. For example, China warned today that the Trump administration’s move to sanction Huawei Technologies could damage ongoing trade talks. The Chinese telecommunications firm is prohibited from buying technology from U.S. companies without special government approvals, which sent U.S. semiconductor stocks lower. Qualcomm Incorporated (QCOM) was down over 4%, and Micron Technology, Inc. (MU) was down over 3% at one point today.

From a risk perspective, most indicators either improved or remained stable today, except one: the U.S. dollar is rising again. Besides the drag a rising dollar places on earnings growth and U.S. exports, I have an additional concern about the dollar’s gains today.

Protectionist strategies like tariffs tend to increase the value of the net-importing nation’s currency. In this case, that means investors have been responding to the trade war by driving up the value of the dollar. What jumps out to me is that investors are buying the dollar despite positive performance in the stock market.

Are currency traders more nervous about resurging trade tensions tomorrow or next week than stock investors? A divergence like that has happened before. The big drop in the S&P 500 in October 2018 was preceded by a rapid buying frenzy in the dollar that began in late September.

What would put my mind more at ease would be confirmation that longer-term interest rates are rising with stocks. Typically, long-term interest rates rise when stocks do because they are both driven by the same underlying fundamental factors. However, since the stock market began to rally on Dec. 24, 2018, that correlation has broken down.

The interest rate on 10-year Treasury bonds rose with the market today, but it is still extremely low. As you can see in the following chart, the 10-year yield is at potential support but below the depths it fell to after the bear market last December. The dollar’s strength and low long-term interest rates are both reasons for exercising caution right now.

I understand that the way I have been describing market conditions lately may come off as a little contradictory. The bull market is still intact, spending is positive and top-line growth is still robust. But on the other hand, trade war risks are high, emerging economies are slowing and interest rates are falling.

In my experience, the benefit of trading in a split market like this is that it favors stocks with strong underlying fundamental growth trends. Sometimes referred to as a “stock picker’s market,” it is easier to identify the likely outperforming stocks when investors have to pay more attention to the fundamentals because the market won’t keep “lifting all boats” like it does when risk is very low.

This kind of market provides an edge for those investors who understand value and why fundamentals can improve their chart analysis.

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