This week, Private Wealth Manager Bradley Johnston, CFP®️, ChFC®️, MSBA, shares the latest figures on retail sales and the job market before discussing earnings from RFA holdings Home Depot, Target, and NVIDIA.


Welcome to the Weekly Market Update.  The stock market remains very volatile, although selling has been fairly orderly without the panicky sell off one would want to see to mark the end of the downturn. We will take a look at retail sales for April and then the quarterly results of some major retailers, some of which were not very pretty and contributed to the sour attitude amongst investors. 

 Retail sales, a measure of spending at stores, online and in restaurants, rose a seasonally adjusted point nine percent last month compared with March. That marked the fourth straight month of higher retail spending, as we can see in this first chart. Consumers spent more at restaurants and bars and boosted expenditures on vehicles, furniture, clothing, and electronics. They cut spending sharply on gasoline in April as pump prices pulled back briefly from a run up related to the war in Ukraine. Stripping out the impact of vehicle and gasoline sales, as we see in this next chart, shows that retail sales handily beat expectations.  Economists said the figures showed the highest U.S. inflation in four decades and uncertainty from the Ukraine war haven’t deterred consumers from spending, which makes up the bulk of economic output. The U.S. is also experiencing an historically tight labor market, with April marking the 12th straight month of solid job gains, adding to positive signs for the second quarter performance by the U.S. economy.  In another sign of economic momentum, the Federal Reserve said industrial production, a measure of factory, mining and utility output, increased a seasonally adjusted 1.1% in April, As we see in this final chart, also a fourth month of gains.  Retail sales aren’t adjusted for inflation. That means that while consumers have continued to spend more, they are getting less due to rapidly rising prices. 

 Defensive Portfolio holding Home Depot boosted its outlook for the year after reporting first quarter sales rose 3.8%, as fewer shoppers spent much more per shopping trip. For the three months ended May 1, Home Depot posted earnings of $4.2 billion, or $4.09 a share, compared with $4.1 billion, or $3.86 a share, in the first quarter of last year.  Wall Street analysts had expected earnings of $3.71 this year.  Sales came in at $38.9 billion, ahead of expectations for $36.7 billion. The home improvement chain said that the average amount spent per transaction rose 11.4% while the number of transactions declined 8.2% in the period, as inflation continues to lift prices across its stores. Same store sales, which adjusts for store openings and closings, rose 2.2% in the period, including 1.7% in the U.S. Home Depot said that it now expects revenue to rise 3% this year after a strong start. The company’s results are the latest sign that consumers are absorbing higher prices. Home Depot was a major beneficiary during the height of the pandemic. At one point during the last two years, the retailer posted four straight quarters of comparable sales growth above 20% as the pandemic left people spending more time in their houses. It is now confronting a slowdown from that high, as well as rising inflation and continued supply chain disruptions. A late start to spring in most parts of the country, as well as the lack of a spending boost from last year’s government stimulus checks, contributed to the decline in customer transactions. But average spending per transaction is growing faster than Home Depot had expected. That is largely due to inflation across several product categories, including core commodities like lumber and building materials. 

 In contrast to Home Depot, many other leading retailers are struggling with higher costs even as revenues rise.  Target, a holding in both the Core and Defensive portfolios, reported results that beat expectations on the top line but badly missed on the bottom line. Target said that the miss was due to higher inventory than expected, increased freight costs, and generally higher costs due to inflation. It appears that consumers remain ready and able to spend, as we saw in the retail spending figure, but that retailers are dealing with ongoing effects of the pandemic related to supply chain issues. Inventory levels may have been too high if the retailer over ordered in fear that supply chain bottlenecks would result in too little stock. Other leading retailers, such as Walmart and Lowe’s, not holdings of ours but direct competitors to Target and Home Depot, reported similar struggles. Traders mercilessly punished the stock prices of these retailers and others. 

 NVIDIA reported $8.3 billion in revenue, a 46% increase from a year earlier and a record for the U.S.’s largest chip company by market value. Net income was $1.6 billion. Sales came in ahead of expectations, but net income was lower than expected.  The company gave a muted sales outlook, citing supply chain disruptions in China and reduced business in Russia, as it posted record sales for the most recent quarter.  NVIDIA said sales in the current quarter are likely to come in at $8.1 billion, missing Wall Street forecasts.  The company said it anticipated a roughly $500 million hit to sales relating to Russia and COVID-19 lockdowns in China.  NVIDIA sales of chips to big server farms that power the Internet, and where the company’s hardware excels in rapidly growing artificial intelligence applications, rose by 83% to $3.8 billion in the first quarter. 

 So, what does it all mean? While retail spending remains strong and consumers have strong balance sheets and great job prospects, many major retailers are struggling with maintaining margins in the face strong inflation. Keep in mind that corporate profit margins are coming off record highs of over 12%, and even around 11% are still above the long term average of 9 to 10%. But investors love to worry about something.  Some are beginning to worry that the results of these major retailers imply a greater chance of recession. It is hard to see how The U.S. slips into recession with corporate and consumer spending still so strong, but we will follow the data as they unfold. So please, sit back, relax, have a great weekend, and join us again next time for the Weekly Market Update. 

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