The S&P 500 (NYSEARCA: SPY) advanced last week despite the rising threat of inflation. The index not only advanced, but it set a new all-time high in the process, and despite the omnipresent threat of supply-chain disruptions. More importantly, the index is set up in a very bullish way that we see leading to a very nice December rally if not a full-blown Santa Claus rally that could last through the end of the year. The reason is simple, the sector that could be most impacted by supply chain disruptions, rising inflation, and consumer angst outperformed expectations and gave a reasonably favorable outlook. While results within the retail sector were not equal, there are certainly winners and losers, the bulk of retailers from Walmart (NYSE: WMT) to Target (NYSE: TGT) beat their Marketbeat.com consensus estimates and provided positive guidance. The unifying theme is that sales remain strong across all channels with two-year comps showing double-digit growth. There has been some mention of the supply chain but most indicate sufficient inventory for the holiday season which is good, but there is something to consider. One of the warnings coming out of the retail sector, and especially from those industries most dependent on Asian-based manufacturing, is that manufacturing shut-downs earlier this year would be impacting inventory levels through the end of the year. While inventory is flush now, what will it look like at the end of the year? Our channel checks show a 10 to 12 month lag time on new orders to Asian manufacturers that suggests retail shelves may be lacking many items come January. That’s good news for some and very, very bad news for others. What it means for the index is a chance for increased volatility if nothing else. Tech is also outperforming right now, don’t forget about that. While the S&P 500 held steady over the last week the Dow Jones Industrial Average (NYSEARCA: DIA) fell and the NASDAQ Composite (NYSEARCA: QQQ) advanced to set a new all-time high. The move is led by broad-based strength within the group with notable strength in the semiconductor industry. Most semiconductor stocks are moving higher on record, systemic demand and the Semiconductor Index is benefiting having risen more than 20% in the last five weeks. We don’t think this trend is over. The Economic Data Was Strong Last week’s economic data was very strong. Reports from the manufacturing sector through Retail Sales, Industrial Production, the NAHB Index, and Business Inventories were all positive and better than expected. The only negative data came from the housing industry and even it is more positive than not. The Permits and Starts figures were lackluster but trending at high levels and only held back by constraints within the economy such as labor and materials shortages. The weekly jobless claims figures and the Index of Leading Indicators are the two reports that really stand out. The total number of jobless claims surged a surprising 600K despite record levels of job availability. The data, to us, raises serious questions about the labor force and the job market that need to be answered. Mainly, why aren’t more people getting back to work? As for the Index of Leading Indicators, it advanced a more than expected 0.9% and points to a reacceleration of activity that is supported by the other data including the bulk of the labor data. What To Expect From The Week Ahead A Short, But Full, Week of Economic Data This is going to be a holiday-shortened week so most of the economic data will come out on Wednesday. That said, there is a lot of economic data coming out on Wednesday with some other important releases on Monday and Tuesday as well. Monday and Tuesday include the Fed’s Chicago Activity Index, Existing Home Sales, and flash reads on PMI. We expect activity to be positive, existing-home sales to be good but constrained by conditions, and for PMI to advance. Wednesday, along with some other reports, we will get the 1st revision to the 3rd quarter GDP and the October read of Personal Income and Spending. That means a double-shot of inflation data but only the Income and Spending data will really matter. The 3rd quarter is far behind us, the market will be more focused on the more-current inflation and the trend of the trajectory. Right now, inflation is hot and getting hotter. We want that to change soon or the FOMC is going to have to start making some unexpected moves. The outlook for rate hikes as forecast by the CME’s FedWatch Tool has subsided a bit in the last week but is still expectant at least one hike by June. We think there will be one before that. The final bit of economic gobblygook for the market to digest before the holiday meal is the FOMC minutes. The minutes will be released on Wednesday afternoon and could reveal new insight into the Fed’s plans but that may not matter. We’re going to get a new Fed chief, soon, let’s hope it’s a good one. Earnings Season Is All But Wrapped Up The earnings season is all but wrapped up but there are a few S&P 500 company’s left to report before the end of the cycle. Regardless, we are not expecting much change in the stats or the outlook, at least not enough to really move the needle, not with more than 95% of the reports in the bag. The good news is that most S&P 500 companies reported better than their consensus estimates, the bad news is that few beat by the kind of margin seen in the past four quarters. At best, the index is going to post YOY earnings growth that is 1000 to 1200 basis points better than expected at the start of the cycle compared to nearly 3000 basis points of outperformance in previous quarters. As bad as that is, however, the outlook for the 4th quarter is worse. Not only will earnings growth continue to fade slowing from 40% to about 20% in the next quarter, but the consensus for 4th quarter earnings has begun to move lower. Our Focus List For The Week Due to the timing of reports and holiday-shortened week, all of our focus stocks are reporting their earnings on Tuesday or Wednesday morning. The first stock on our list is Best Buy (NYSE: BBY). The company is well-positioned as a tech retailer and expected to give strong results. The risk, of course, is the supply chain and how stocked it can keep the shelves. Assuming that merchandise levels are good (they look OK enough at our local store) we expect to see the company outperform the consensus. Dick’s Sporting Goods (NYSE: DKS) is another retail winner that we expect to hear good news from. The return to school and resumption of team sports was a second wind for the sporting goods industry and Dick’s Sporting Goods is a go-to name with a healthy eCommerce presence. The analysts are expecting growth but we think the 2.9% gain in revenue implied by the Marketbeat.com consensus estimate grossly underestimates not only retail but sporting goods retail. Cracker Barrel (NASDAQ: CBRL) used to be one of our favorite dividend-growth stocks and then the pandemic hit. The store has been coming back strongly in the time since and is on track to resume dividend growth if at a reduced pace. The company is expected to post sequential growth and YOY growth but not 2-year growth by the analysts, we think there is upside risk in the numbers but it’s the earnings that will count. If the company can hire and retain staff, and manage rising inflation, price action may move back up to the pre-COVID levels. This is the chart of the week.
 Jack In The Box (NASDAQ: JACK) reports after the bell. Jack In The Box is the biggest or the sleekest of the hamburger chains but it is the one with the best outlook for growth. The company’s relatively new CEO is working hard to expand not only franchising but systemwide unity and expansion into new markets both domestic and foreign. The analysts are expecting YOY growth to accelerate to 13% and we think the company could top those figures. Our final focus-stock of the week is Movado Group (NYSE: MOV). Movado Group makes and markets watches and other personal effects through eCommerce and wholesale channels. The company is well-positioned within the consumer discretionary market and should benefit from tailwinds that are expected to drive double-digit earnings growth in the sector next year. Regardless, the analysts are expecting a significant jump in revenue and a company record. We agree with the sentiment and think it could drive shares back up to their pre-COVID highs. Until then, remember the trend! Thomas Hughes
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