Dollars and Sense: Earnings surprises, interest rates give investors the blues

Earnings surprise. Last week I warned you that a few last minute earnings surprises might disrupt the normally calm markets, and that’s exactly what happened. Retailers are usually the last to report during earnings season because many of their year-ends are actually in January, to fully account for the Christmas season. So this week, even though earnings season is mostly over, we got reports from Macy’s, Walmart, Kohl’s, and Nordstrom’s. The Walmart report was the one that sent the markets down on Thursday. It wasn’t so much that Walmart’s past performance was that terrible—it was what the retail giant said about the rest of the year that caused jitters. Both Walmart and Nordstrom’s, plus Cisco Systems, missed their numbers, and Walmart revised downward its expectations regarding both sales and earnings for the rest of the year. Cisco Systems is not a retailer, but it provides a lot of infrastructure for the internet, including e-commerce, and that’s a growing part of retail sales. When you add to this a U.S. Commerce Department report that said retail sales for July rose, but only 0.2 percent, less than expected, it’s no surprise the markets reacted. Analysts cited a weak back-to-school season and just general consumer jitters.

Interest rates. Interest rates have increasingly been in the news. The yield on the 10-year Treasury note was up to nearly 2.8 percent this week. Mortgages rose to an average above 3.5 percent. The rise in rates is affecting the equities market. If people can get a guaranteed 3 percent with a bond, and they’re weighing that return against the possibility of a downward correction in the stock market, it’s kind of a no-brainer to shift some money out of stocks and into bonds. That seems to be what’s happening now, which is tending to put on a cap on the stock market rally.

Inflation? So are these interest rate moves a precursor to inflation? One of the concerns about the Federal Reserve’s $85 billion per month bond-buying program is that it will eventually cause inflation. With bond yields going up, and mortgage rates going up, are people beginning to worry about that? One analyst told me that it wasn’t bond yields per se that concern them, but the rate of rise. The fact that bond yields have gone up more than a percent, about 120 basis points, in the past 45 days is what economists are watching.

The week ahead. So will the downward pressure continue into next week? It’s important to remember that on any given day, you can’t predict what the markets will do. As my friend and financial analyst Danny Fontana often says, on any given day, the reason the market goes up is because there are more buyers than sellers. When it goes down, there were more sellers than buyers. Everything else is just a guess. That’s true, but some guesses are better informed than others, and it is possible to determine what buyers and sellers care about. Lately, the one thing investors seem to care about more than anything else is what the Federal Reserve will do. The Fed’s Open Markets Committee releases the minutes of its July 31 meeting on Wednesday. Those minutes will tell us what Fed members were thinking on that day, now nearly three weeks ago, and analysts will compare that to the data we’ve seen since then. They’ll try to determine whether the Fed will taper its bond-buying program in September. We’ve seen the GDP outlook go down, but the employment picture get a bit better. If the Fed minutes lean one way or the other as its key indicator, you can expect the markets to move accordingly.