On Tuesday I wrote:
The Street interpreted Best Buy’s results as saying that the American consumer is not dead and will continue to spend on discretionary items.
That interpretation seems to have played out this week. The S&P Retail Index closed Monday at about 450 (Best Buy reported before the bell on Tuesday) and is ending today around 473 – a 5.1% increase.
In fact, this is just the interpretation Robert Walberg over at MSN Money made:
Best Buy’s latest earnings report goes a long way to dispel concern about a consumer led economic slowdown.
A couple of things are worth pointing out. Walberg notes that Best Buy’s sales increased 13% and same store sales were up 3.7%. Why then did I write on Tuesday that sales were up 10.4% and same store sales 3.0%? Because I focused in on domestic sales. International sales were much stronger and brought the overall numbers up. But in the context of worrying about a US consumer led economic slowdown those are the relevant numbers.
The markets are somewhat confusing right now.
For the 9 weeks beginning Monday July 17, the Dow has rallied from around 10,750 to today’s close of 11,560 – a 7.5% rally. Over the same period the S&P 500 has rallied from around 1235 to today’s close around 1320 – a 6.9% rally. The Nasdaq has risen about 200 points from 2035 to today’s close around 2235 – a 9.8% rally. The yield on the 10 year treasury bond has gone from over 5.2% at the beginning of July to today’s close around 4.8% after having risen for the first half of the year.
What is this all about?
Mainly, I think, the Fed pause on August 8. Why then did the market start to rally three weeks prior to the Fed pause? Because they saw it coming. I think that people started to see that housing was slowing, that the economy was cooling as a result and they began to anticipate a Fed pause. A Fed pause, of course, reduces interest rate pressure on households and corporations. When the Fed actually did pause on Tuesday August 8, the rally was on for real.
Home builders have been rallying pretty well since July 17 and now with the Best Buy quarter I think the “soft landing” crowd is out in force. People with this view don’t believe the economy will fall into a housing/consumer led recession and therefore that corporate profits and stock prices will hold up. If you have that view, stocks represent a pretty good value right now.
The next big event is the meeting of the Federal Open Market Committee (FOMC) next Wednesday (September 20). However, it looks all but certain that the Fed will leave the federal funds rate at 5.25% – the Fed Futures Market at the Chicago Board of Trade (CBOT) is pricing a 90% probability of no change.
We won’t really know who is right until companies start reporting 3rd quarter results in October and, really, 4th quarter and full year results at the beginning of 2007.