ANF may take another blow to its increasingly troubled brand this week in a SCOTUS ruling, EEOC v Abercrombie & Finch, regarding a girl who was not hired because she wore a hajib to the job interview. Why ANF would even fight this case is beyond me. Management needs to think over what message they are trying to send. Wouldn’t touch this stock with a 10 foot pole. Lightening rod headline risk.
The bond market took a hit after the release of April CPI which came in a bit higher than expected on higher rents, medical care, and the NYC transit fare hike. 10-year note futures are down over half a point from pre-CPI levels. Eurodollar futures are down 5-6 bps. Does this print bring the Fed closer to hiking rates? Higher rents is a good thing for the housing market, and the Fed's move to higher rates must be accompanied by strength and stability in housing. But medical care costs and NYC transit fares are not going to concern the Fed.
S&P futures were hit down 0.3% post-CPI, but after opening, the market is back to flat. The stock market should have a positive reaction to this data, because the Fed tightening is all depend on housing in my opinion. Existing homes sales came out weak yesterday, and the bond market had a nice rally on that which has been reversed today. If the Fed hikes on economic and housing strength, the stock market should not have a materially adverse reaction. The Fed wants a strong housing market, so they will be careful to try to avoid knocking out any growth in housing with their rate hikes. The USD is stronger. Stocks need to shake of their habit of immediately reaction to data through the lense of the Fed rate hikes. The Fed is going to tighten. There is very little doubt about that. A 50 bp Fed Funds rate is not restrictive. Discretionary stocks and financials should benefit as well as other cyclical stocks except commodity stocks which will be hurt by the stronger USD. I think the market should be up on this CPI print.
On the company level, FL had a good earnings report strong comp store sales up 7.8%. Retail has been a nightmare, so it's good to see one retail stock showing strength. ROST also had a good report yesterday after the close. I like both those stocks, but I don't like retail in general. FL & ROST are the only retail stocks I would buy right now.
With Q1 earnings largely behind us, the market volatility has fallen off a cliff. Last Thursday (May 14), the S&P put up a big 1.1% rally. Then the range on the S&P on Friday was just 0.3%, and Monday's range was 0.5%. Today's range is again only 0.3%. The current volatility is a huge drop off from the past 100 days average range of around 1.0%. You could interpret this in a bearish light, calling it a stalled rally. But I think this low volatility is bullish, and I believe the market goes higher from here. My favorite sectors are health care and tech. Volatility has shown up in the bond market. Bonds traded heavy into the refunding and posted a bit of a rally subsequent to the 10 year and 30 year auctions. But the bond weakness has returned, and the 10 year is now below the auction stop level. I don't like bonds here, but the market might have a relief rally post-FOMC minutes tomorrow which will probably be a selling opportunity. I believe the Fed is firmly on the path toward tightening, and the housing market would have to show significant weakness before the Fed backs away from this tightening bias.
A healthy market does not trade down 1% then back up 1% then back down 1%. This back and forth is a bearish signal. I can understand a bit of a selloff on the back of weakness in fixed income. The 2 weakest sectors, utilities and telecom, are yield plays, so I can understand why they led the way down. But there were signs of indiscriminate selling today. Higher yields should cause a rotation not an outright liquidation. Look at semis. This sector has not made any sense in months. Some are strong, some are weak. I get the Apple supplier story, but that cannot explain everything going on in semiconductor stocks. This sector is too broad and covers so many industries. The USD was even down today, but semis down too? Today every sector went down and it was mainly sentiment driven from what I can tell. This is not the sign of a healthy market. The tech sector down 1.6% on higher yields? That doesn't make sense. Oil up today, but energy sector down? There is more going on here with this market and its not bullish...
The health care sector has had a tough time keeping up with the S&P recently. In particular, the biotech sector has been hit hard. Over the past 1-week and 1-month time frames, health care has been the worst performing sector. Yet this high-level sector view doesn't tell the whole story. When I look on the individual stock level, my top 3 stocks are in the health care sector: GILD, AET, and ABBV. Although the health care sector as a whole may be swimming up stream against historically high valuations, these 3 are actually quite cheap and in position to continue to generate strong free cash flows. I concede the pharmaceuticals and biotechs are trading at full valuations, but GILD, AET and ABBV should not be overlooked just because they are in the health care sector.
Michael Grove, CFA