Stocks edge lower on disappointing earnings, political uncertainty

Department store reports dismal earnings results on Thursday, May 11, 2017. (Shen Lu/MEDILL)
Department store reports dismal earnings results on Thursday, May 11, 2017. (Shen Lu/MEDILL)

By Shen Lu

Stocks fell slightly on Thursday as political risks and higher-than-expected inflation at the wholesale level weighed on investors.
The Dow Jones Industrial Average initially fell by as much as 144 points after major department stores reported disappointing earnings, but it later rebounded.

The Dow closed down 23.69 points, or 0.11 percent, at 20919.42. The Standards and Poor’s 500 index edged down 5.19 points, or 0.22 percent, to close at 2394.44. The Nasdaq Composite Index slipped 13.18 points, or 0.22 percent, to close at 6115.96.

The bond market advanced, with the yield on the benchmark 10-year Treasury note falling 2 basis points to 2.39 percent. Yields fall as bond prices rise.

Shares of Macy’s Inc. plunged more than 17 percent, while Kohl’s Corp. and Nordstrom Inc. both fell nearly 8 percent, after reporting weak sales at stores open for more than a year.

Shares of Snap Inc., parent of Snapchat, plunged  21.5 percent after it reported a $2.2 billion quarterly loss and fewer daily users than expected in its debut earnings release late Wednesday.

News from Washington late Tuesday that President Donald Trump had fired FBI Director James Comey cast uncertainty on the market, analysts said. Comey was leading the investigation into the Trump campaign’s ties with Russia during the election.

“People start to wonder whether or not the president is really in charge and will be able to get his policies implemented,” said Bob Carey, chief market strategist at First Trust Advisors LP.

Stock investors have pushed prices to record highs since last year’s election, amid excitement around Trump’s promised tax reforms, infrastructure spending and reduced regulation.

But investors should not worry too much about a single-day pullback, as the majority of the companies in the S&P 500 Index reported better-than-expected first-quarter earnings results, according to Carey.

“Better earnings, better tax policy, are going to help the market the rest of the year,” Carey said.

Travis Miller, an equity analyst at Morningstar Inc., said the recent subdued price movement in the market indicated that it’s overvalued. The price-to-earnings ratio for the S&P 500 stands at 21.35, above the long-term average of about 15.

“In general the market is getting over the Trump hangover,” said Miller. “We should worry about the valuations coming in, and part of that could be disappointing growth, part of that could be higher inflation, and the biggest thing would be just investors realizing that the positive outlook is already more than priced into the market.”

The U.S. Labor Department reported a larger-than-expected rise in wholesale prices in April. The producer price index was up 0.5 percent, compared with economists’ consensus estimate of 0.2 percent. Wholesale prices fell 0.1 percent in March.

Carey said increasing inflation pressures might result in more interest rate increases as the year goes on.

“When inflation is running, that means the economy is improving,” said Miller. “And that’s going to have a positive impact on stocks in the long run, but it could cause stress in the near term.”

Photo at top: Department stores report dismal earnings results on Thursday, May 11, 2017. (Shen Lu/MEDILL)