Stocks Dragging

Stocks opened lower this morning and I’ve heard several theories to explain it. First, the market can’t keep going up in a straight line. The last time we had a measly 5% correction was October, and since Halloween major stock market averages are up about 20%. Second, economic growth and inflation have been a bit higher than expected in the new year, which suggests the Federal Reserve may not begin to cut interest rates soon. Third, continued momentum in Nvidia and Bitcoin suggest a bubble that will burst at some point. All three could be true, but I’ll side with #1 as the simplest explanation.

Weakness in China is dragging down some US large-cap stocks. Not only is China’s economy under the weather, but the communist regime is encouraging a shift away from use of foreign tech products. And of course, the US government is beginning to wake up to China’s cyber spying as well. Analysts at JP Morgan say Apple’s iPhone sales in China fell 24% during the first six weeks of this year. And yesterday we learned that AMD might be blocked from selling AI chips to China due to national security concerns. Tesla’s vehicle shipments from the Beijing factory are down 19% from a year ago. And Starbucks expects sales in China to barely grow this year due to “a more cautious consumer.” While China’s economy is still (probably) growing faster than the US, its trajectory has slowed and the country is struggling with deflation (i.e. wages and home prices are falling). Investors are hoping for more government stimulus to boost demand, but so far the regime hasn’t obliged.

Target (TGT) reported fourth quarter sales that grew 1.6% from a year ago, which was in line with analysts’ forecasts. But the shocker was a much improved profit margin. The gross margin has recovered to 25.6% vs. 22.7% in the year-ago quarter. For a retailer plagued by rising theft, shifting consumer demand patterns, poor inventory management and high cost inflation, this is a great result. During the quarter supply chain costs fell, management reduced inventory by 12%, and sales declines narrowed. And after a rough 2023, management projects a return to positive sales growth this year. The worst is over and with Wall Street analysts anticipating recovery, the stock popped 11% in early trading.