By Kyle Prevost on November 17, 2023
Estimated reading time: 7 minutes

Making sense of the markets this week: November 19, 2023

By Kyle Prevost on November 17, 2023
Estimated reading time: 7 minutes

Target’s up, Walmart’s down, stocks rise as inflation falls, and insurance companies thrive as grocers stumble. Also, how’s that housing bubble?

A Target storefront as we report on earnings

Photo by Shabaz Usmani on Unsplash

Kyle Prevost, creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course, shares financial headlines and offers context for Canadian investors.

Target shareholders finally avoid slings and arrows

The big headlines in U.S. retail this week centred around Target shares seeing a massive 18% spike, while Walmart shares came down over 8% after Thursday’s earnings announcement. However, we look behind those headlines to the context of those moves to get the real story.

U.S. Retail earnings highlights

All earnings numbers in this section are in USD.

Walmart (WMT/NYSE): Earnings per share of $1.53 (versus $1.52 predicted). Revenue of $160.80 billion (versus $159.72 billion estimate).
Home Depot (HD/NYSE): Earnings per share of $3.81 (versus $3.76 predicted). Revenue of $37.71 billion (versus $37.6 billion estimate).
Target (TGT/NYSE): Earnings per share of $2.10 (versus $1.48 predicted). Revenue of $25.4 billion (versus $25.24 billion estimate).
Macy’s (M/NYSE): Earnings per share of $0.21 (versus $0.00 predicted). Revenue of $4.86 billion (versus $4.82 billion estimate).

While the quarter was obviously a great redemption story for Target, these volatile stock moves were based on sky-high expectations for Walmart (the stock hit an all-time high this week before the earnings announcement) and a relatively terrible year for Target so far. It’s still down over 14% year to date even after the earnings bump.

Target’s C-suite commented that its improved margins were due to progress made on inventory management and reducing expenses, as well as reduced shrinkage (theft).

Walmart’s team stated the company is still worried about pressure on the U.S. consumer despite higher online sales (24% increase in the U.S. and 15% worldwide this year) and increased grocery revenues.

Walmart CEO Doug McMillon believes price relief might soon be in the cards, saying that general merchandise and grocery prices should, “start to deflate in the coming weeks and months.” He said, “In the U.S., we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it, because it’s better for our customers.”

We’re fairly certain that Walmart will be able to resist that “unit pressure” and that it will manage to satisfy both shareholders and customers, given its track record over the years.

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CPI goes down, stocks go up

If you needed confirmation that U.S. interest rates are still foremost on investors’ minds, this week’s Consumer Price Index (CPI) from the U.S. Department of Labor was a big checkmark. Stocks rallied after Wednesday’s news that headline CPI was down to 3.2% annually (before coming down slightly later in the day’s trading session).

CPI summary index report highlights

The main takeaways from the CPI report included:

Core CPI (which excludes food and energy prices) is still at a 4% annual rate of increase.
Both the headline CPI and core CPI numbers were lower than anticipated Wall Street estimates, which led to market optimism.
Gasoline costs were down 5.3% annually.
Shelter costs were up 6.7% annually and were a major part of the overall headline inflation raise.
Travel-related categories ,such as hotel pricing and air travel, were also down substantially.
Used vehicles are down 7.1% from a year ago.
With unemployment rising from 3.2% to 3.9%, there should be less pressure to increase wages in most sectors going forward, thus contributing to a reduction in both headline CPI and core CPI.

Market watchers at CME Group report that the chances of any immediate interest rate hikes by the U.S. Fed have declined to nil. As you might expect, this confidence drove down long-term bond rates and raised future expectations for corporate earnings (and share prices).

If this whole inflation thing still has you stumped, here’s a humorous three-minute take from the gang at It’s Always Sunny in Philadelphia:

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In Canada: Insurers fare better than grocers in Q3

Four familiar names from the world of Canada’s insurance and grocery oligopolies reported earnings this week. It was better to be an insurer than a grocer over the past few months, as government pressure to lower grocery margins may have played a part in reduced earnings.

Canadian insurance and grocer earnings highlights

Here’s a summary of the earnings news in Canada this week.

Sunlife (SLF/TSX): Earnings per share of $1.19 (versus $1.15 predicted). Revenue of $1.82 billion (versus $1.80 billion estimate).
Power Corp (POW/TSX): Earnings per share of $1.52 (versus $1.08 predicted). Revenue of $8.49 billion. (Comparison not available at press time.)
Loblaw (L/TSX): Earnings per share of $2.26 (versus $2.23 predicted). Revenue of $18.26 billion (versus $18.21 billion estimate).
Metro (MRU/TSX): Earnings per share of $0.99 (versus $1.07 predicted). Revenue of $5.07 billion (versus $5.08 billion estimate).

Metro’s earnings miss pulled shares down nearly 7% on Wednesday, while Loblaw shares were down a little over 2% despite its earnings beat. Both Canadian grocery giants credit increased pharmacy sales of weight-loss drugs and cold medication for top-line growth. Cosmetics sales were also noted as an area of growth. Perhaps due to the “Lipstick Index” effect of small luxury goods gaining appeal in lean times?

Both companies commented on two trends: increased traffic to discount stores and the rising prices of food suppliers.

Metro CEO Eric La Fleche stated its food-basket inflation measurement was 5.5%. No doubt this was in reference to federal government pressure to reduce prices in the grocery space.

With both Sunlife and Power Corp. beating earnings expectations this week, it was no surprise to see share prices rise more than 6% over the last five trading days. These positive earnings reports largely mirror those of competitor Manulife (MFC/TSX), which we wrote about last week. For more information on Loblaws and Metro check out my take on investing in Canadian retail stocks at MillionDollarJourney.ca and MoneySense’s “Best dividend stocks in Canada.”

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Has the housing bubble deflated?

The folks at Visual Capitalist created yet another cool visual. This one looks at how the world’s housing markets have changed over the past year. Canadian home buyers may take some solace in the fact there are a few other places rated more overvalued than Toronto and Vancouver. Although, not many.

The housing market situation right now

Here are six takeaways we gleaned when looking at the infographic:

Higher interest rates and accompanying higher bond rates have had different effects on each market. It’s likely due to the different types of lending in each country. For example, Stockholm had the biggest home value decline by a fair margin—likely due to the fact that 70% of Sweden’s mortgages are variable-rate. On the other hand, the U.S.A. has a sizeable 30-year mortgage market. And those Americans who locked in low rates two or three years ago won’t really feel the budgetary sting of higher interest rates at all.
The U.S. numbers are interesting in that despite housing prices staying relatively steady, many of its major cities remain the least overvalued on a world scale.
Despite Toronto’s and Vancouver’s markets falling 14.7% and 10.6% respectively, they are still firmly in the “overvalued” category, with Toronto approaching “bubble risk” territory.
The numbers are adjusted for inflation, so the price you’re paying will not have shrunk 14.7% or 10.6%. In fact, it would be much closer to 5% or so. It’s just that “everything has gone up,” so these numbers are relative to that inflation reality.
Both Toronto and Vancouver seen substantially rising rents despite housing prices falling.

This data is sourced by the UBS Global Real Estate Bubble Index and is based on each city’s historical trends, housing prices relative to local income and rents and imbalances in construction activity versus market demand. Consequently, it’s reducing several variables down to a single number. But it’s a pretty interesting number nonetheless.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.