Stocks Fall to Start Short Thanksgiving Week

Stocks fell Monday to start a shortened week, as the stock market closes for the full day Thursday and at 1 p.m. Friday in observance of Thanksgiving.

Earnings will be light and economic activity will be condensed this week, with New Home Sales, weekly jobless claims, and Durable orders all due Wednesday morning.

New Home Sales

The New Home Sales report due Wednesday will be interesting as the housing market has struggled since the onset of rate hikes.

Sales of newly constructed homes fell 10.9% in September and came in 17.6% lower than a year before. Inventories of new homes remained in the buyer territory at 9.2 months of inventory while prices continued to rise.

This time around, economists are projecting a rise/fall to an annualized rate of 578,000, compared to 603,000 in September.

Rising prices have skewed the market to higher-priced sales as homes under $399,999 accounted for 34% of homes compared to 45% a year ago. Meanwhile, rates have soared to 7.08%

Without a drop in rates to bring in new buyers, this dynamic is expected to continue, according to Kelly Mangold of RCLCO Real Estate Consulting. This shift could start soon, according to Oxford Economics, as the firm expects new home prices to “ease in the months ahead as builders cut prices to clear inventory”.

New home sales are viewed as an indicator of the direction of the housing market, despite just 10% of sales coming from new homes. This is because these sales get counted when contracts are signed, rather than on close like existing home sales. This makes it a more timely barometer of the housing market.

However, the reported figure is very volatile as the previous reports' 90% confidence interval ranged from a 26.1% decline to a 4.3% jump. Whatever the headline figures say, it's important to look at revisions as well for a clearer understanding of the direction of the market.

Earnings

While earnings will be light as the earnings season comes to an end, there will still be some notable earnings reports. Best Buy and Dollar Tree will round out retailer earnings, while Deere will be a proxy for the agriculture industry.

Best Buy (BBY) earnings should be telling as it follows a better-than-expected report by Walmart last week, underwhelming reports by PC makers as demand wanes, and a shocking Target report that both missed the mark and noted that organized retail crime reduced its profit margins by $400 million so far in 2022 and that it expects that number to hit $600 million by the end of the year.

We already know that Best Buy has been struggling with the issue of organized retail crime and that this has led companies like Best Buy to start locking away goods. So it will be interesting if Best Buy has had more success than Target in fending off theft.

Likely, the bar for Best Buy’s upcoming report will be in the better-than-feared territory, and any guidance and comments on what it expects this holiday season to look like will be crucial.

Budget retailer Dollar Tree (DLTR) will be another report worth a follow. Dollar Tree issued downside guidance for earnings and revenues for both the third quarter and full-year 2023.

This came as a result of the company adjusting its strategy to focus on needs-based consumable products, which have lower margins. Dollar Tree said it is focusing on the company’s Family Dollar segment to enhance its long-term productivity and profitability by improving merchandising, store standards, and its pricing strategy.

Lastly, Deere’s (DE) report should be watched. Shares fell last time around after the company struggled with supply chain issues.

Caterpillar (CAT) has and continues to same issues it said in its earnings report in late October. However, CAT managed to improve dealer inventories, which increased by $600 million compared to a $300 million drop in inventories the year before as some of those issues waned. Further, Caterpillar also offered optimistic comments for the fourth quarter.

For Deere, we will be monitoring how it has managed to cope with supply chain issues and its forward-looking comments. Demand has remained solid for Deere and Caterpillar, but deals are being left on the table as they struggle to meet demand. Signs of improvement and comments painting a brighter picture will go a long way for the machinery company. `