Earnings Ahead

Market Moves

The S&P 500 index (SPX) closed at yet another historic high, buoyed by a lower-than-forecast number for initial unemployment claims. Commodity prices fell, and the U.S. dollar index (DXY) rose in anticipation of a favorable Non-Farm Payroll report scheduled to be released before the market opens tomorrow. The Dow Jones Industrial Average (DJI) and the Nasdaq 100 index (NDX) also closed higher.

The bullishness in the markets has even reached the restaurant industry, which appears to be reversing a downward trend it began over the summer. The chart below shows how shares of several restaurant chain companies have recently made up for lost ground. This chart compares the broad market index with an equal-weighted portfolio of McDonald's Corporation (MCD), The Coca-Cola Company (KO), and Darden Restaurants, Inc. (DRI). The implication in this comparison is good news for bullish investors because it shows that the indexes' initial move higher this year is broader than it previously might have appeared. It is clearly not limited to highly visible technology companies alone.

Chart showing the share price performance of fast food companies

Inside the Financial Sector

Earnings season kicks off next week as many stocks in the financial sector report their fourth quarter results. The sector has generally traded with a range-bound appearance over the past few weeks in anticipation of these reports. 

The chart below depicts the top holdings within State Street's sector index ETF for finance (XLF). The chart tops out with Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), and The Goldman Sachs Group, Inc. (GS). Of the top six holdings, only Wells Fargo & Company (WFC) trades below the average, while Citigroup Inc. (C) and BlackRock, Inc. (BLK) trade above.

What is important to recognize here is that, while the average of these stocks is a sideways move, not all of these stocks head into earnings season with a sideways posture. Goldman Sachs shares, in particular, show a greater degree of investor demand than others stocks. However, the whole sector is likely to benefit if the early-reporting companies have positive news. Citigroup, JPMorgan Chase, and Wells Fargo all report on Tuesday before the market opens.

Chart showing the performance of financials stocks

Winners and Losers in Retail

Many analysts, and indeed investors in general, opine that retail stores are all in danger of obsolescence from the encroachment of online shopping. But 2019 seemed to be the year that definitively showed that some brick-and-mortar establishments are still highly valued by customers and investors alike. Alas, not all such stores are valued equally.

The chart below displays a comparison between Target Corporation (TGT) and Kohl's Corporation (KSS) that illustrates this point well. Over the past year, the two companies exhibited similar share performance, but by May, it was apparent that the former had adapted well to the new market climate while the latter had not. In the last half of the year, Target shares went on to complete a 100% increase for the year, while Kohl's shares lost 20%.

Investors are likely to demand serious revamping of retail business behavior in light of such results. It will be unlikely that all store chains can afford to do what is necessary to adapt. Cautious traders should be wary of holding on to retail stocks that are poorly positioned going into 2020.

Chart showing the share price performance of Kohl's Corporation (KSS) and Target Corporation (KSS)

The Bottom Line

The stock market's new highs were accompanied by a drop in commodity prices, which implies a further reduction of perceived risk in the markets. Fast food chains appear to be making up ground lost over the previous quarter, winners and losers are still being sorted out in the retail sector, and the financial sector is prepared to kick off earnings next week.

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