It is getting harder and harder to find positives to write about within the current market, especially when it comes to the economy. Every day it seems investors get another sign that an economic downturn is on the near-term horizon. Monday, we saw an absolutely woeful May Empire State Manufacturing report.
The index fell to -31.8 versus the -3.7 consensus and a notable deterioration from a positive 10.80 reading in April. While this report has been volatile recently, this is the worst reading outside of the pandemic, where everything shut down, since the Great Recession some 15 years ago. Both shipments and new orders fell off a cliff and this is something that bears watching.
Home Depot (HD) help set the tone for trading on Tuesday after it reported first quarter results before the bell. The company managed a slight earnings beat thanks to effective cost cutting measures. However, revenues came in at just over $1 billion light of expectations, the biggest sales miss percentage wise in over 20 years. It was the second straight top line miss for the huge retailer after a dozen straight quarters of sales beats.
Store comps at Home Depot were a negative 4.5%, compared to the -1.6% expected. Management also lowered its full year guidance significantly. Home Depot now expects revenues to be down 2%-5% for the fiscal year while earnings are projected to fall 7%-13% compared to FY2022. Not surprisingly, these dismal results sent a chill through the entire building materials sector.
Overall, April Retail sales rose .4% on Tuesday as well. This was below the .7% increase expected, albeit core retail sales rose in line to the forecast. I expect retail sales to continue to decline. Partly as a result of inflation falling it should be noted.
However, the consumer has spent a good portion of the Covid stimulus savings. Overall debt levels also just surpassed $17 trillion for the first time in the first quarter, up nearly $3 billion from the start of the pandemic. With credit criteria tightening and delinquency rates rising, the consumer is going to be increasingly hard pressed to drive the economy.
Tuesday also saw a weekly crude oil build of nearly four million barrels, the consensus had inventory falling some 800,000 barrels. At Cushing, almost three million barrels were added to last week's reading, the highest level at that energy hub since January.
We have seen weakness in reports around Manufacturing, Retail and Energy and that is just in the first two days of the trading week. Add in the drama of the debt ceiling talks, and it is easy to see the desire to park a good chunk of one's portfolio on the sidelines at the moment. Unfortunately, I believe that will continue to be the case until a deteriorating economic environment brings lower entry points for investors
Trying to end of a brighter note. I will circle several small-cap stocks on Friday that are managing to execute well in a tough environment. This will include Applied Digital Corp (APLD) that just secured its first major AI customer this week.
