How healthy is the American consumer? Everyone on Wall
Street is wrestling with that question — and we got two starkly different
portraits from today’s key retail earnings reports.
On the one hand, the retailing giant Wal-Mart Stores (WMT)
just reported quarterly earnings of $1.08 a share, a sharp decline from $1.21 a
share in the year-earlier period. That missed analyst forecasts.
Revenue also barely budged to $120.2 billion, and the firm
warned that full-year profit will come in light. Wal-Mart blamed everything
from the strong dollar to wage hikes in the U.S. to higher theft rates.
On the other hand, home-improvement retailer Home Depot (HD)
gave its shareholders a reason to smile. The company reported $2.23 billion, or
$1.73 a share, in profit in the fiscal second quarter. Stripping out two cents
in unusual items, you get $1.71 – slightly above Wall Street forecasts.
Revenue of $24.83 billion also beat forecasts. Plus, the
company said full-year sales will rise as much as 6% while profit will climb as
much as 14%. That 2015 outlook came in hotter than expectations, with online
sales and increased sales per location helping to boost results (versus
gratuitous new store openings). It also just purchased the building and
maintenance supply company Interline for $1.6 billion.
Home Depot is benefiting from the home-renovation trend.
What happened in response? Shares of Wal-Mart dropped 3.4%
to a fresh 30-month low. Shares of Home Depot rose 2.6% to a fresh
all-time high. Talk about a huge split between winners and losers!
It seems clear to me that Home Depot is benefiting from the
gradual, two-steps-forward, one-step-back, recovery in housing. For example, we
learned today that housing starts rose 0.2% to a seasonally adjusted annual
rate of 1.21 million in July. That was the highest since late 2007.
A resurgence in multifamily construction, and the rise of
investor buy-to-renovate-then-rent activity, is also helping the company.
That’s all part of the “Renter Nation” trend I wrote about last month.
But Wal-Mart doesn’t focus on housing-related expenditures.
It sells a little bit of everything, and it tends to serve
lower-and-middle-income Americans. They’ve been left behind in this economic
recovery. Unless and until they see meaningfully higher wage growth, Wal-Mart
is going to struggle to rack up better sales and profits.
So it really depends on which American consumers you’re
talking about. Those at the higher end of the income spectrum, and those who
are looking to buy, renovate, or furnish homes, are feeling flush and spending
like it. Those at the lower end of the scale, who are struggling to make ends
meet, are also spending like it.
I think we need to see everyone pulling together for it to
be a bullish sign for U.S. markets and the U.S. economy. And frankly, I’m just
not seeing it. So you can add the latest retail earnings to my long list of concerns
about stocks.
“It really depends on which American consumer you’re talking
about.”
That’s my take. But what’s yours? What’s more convincing to
you – the bullish story told by Home Depot or the bearish one told by Wal-Mart?
Is the American consumer healthy, and should you bet on
America’s economy? Or is he or she struggling, and should you take a more
cautious approach to investing as a result? Be sure to voice your opinion over
at the Money and Markets website.
Our Readers Speak
Stocks have been marking time the past several days, with
the major averages continuing their pattern of treading water since the
beginning of 2015. But many of you appear to believe this won’t continue, which
is generally in line with my own views.
Reader J.T.A. said: “I appreciate your letters and insight
on the economy. With most of the economic news so negative worldwide, this is
the time to be very cautious.
“I have been planning all year to reduce my equity holdings
and am waiting for the signal from you before I do any more investing. I plan
to go to 100% cash in my IRA by mid-September, if not before.”
Reader Donald L. also weighed in, saying: “The ‘market’
(however you define it) went up for the past five years despite all the various
measurement indices of the economy saying the contrary. The triumph of hope
over fact ignored the 800 pound gorilla in the room – government policies at
all levels. “Will the forthcoming elections bring relief? Sorry, but I’m
betting with those buying put options and negative indices.”
Reader Mule said he’s worried about where stocks head from
here too: “I don’t think the market has climbed the old ‘wall of worry’ so much
as it has rode a wave of cheap worthless debt money, in spite of continuous
negative real economic data. When the worthless paper balloons burst, look out
below. The ‘wall of worry’ will get buried.”
But Reader Gary took a slightly more optimistic bent,
saying: “Buying great Blue Chip companies will always make you a winner long
term. Try Boeing (BA).”
Thanks for sharing. Personally, I see a world where economic
growth is rapidly decelerating in many countries … where manufacturing and
multinationals continue to face challenges here … where many domestic stocks
are underperforming the misleading averages … and where many global stocks are
in full meltdown mode.
That’s not exactly fertile ground for huge stock market
gains. It’s more likely the kind of environment where a “trap door” could open
up at any time, and where caution makes the most sense to me.
Meanwhile, on a different topic, Reader Etoleary said: “The
‘Donald Trump Effect’ that is the non-specific anger of large numbers of our
citizens is more broadly based than simply the Republican primary candidates.
This to me is becoming a generic sort of index of frustration. Someone should
figure out a way to quantify this.”
I appreciate your comments, too. There definitely seems to
be dissatisfaction with mainstream politics right now, and it’s leading to a
backlash against mainstream candidates. The key question is whether Americans
actually vote in large numbers for alternatives like Trump or Bernie Sanders,
or stick with what they know at the ballot box (despite their stated
discontent).
Other Developments of the Day
Chinese stocks resumed their descent overnight, with the
benchmark Shanghai Composite Index tanking 6.2%. Almost 6 out of 10 listed
stocks dropped by their 10% daily limit amid questions about how much
government support will be thrown at the market, how weak the underlying
economy is, and how much money investors on margin will yank out of stocks.
Thai police are searching for an unidentified man who
apparently left a backpack bomb under a bench near the Erawan Shrine in
Bangkok. The bomb exploded later, killing at least 20 people in the heavily
trafficked area. The country has been facing political turmoil, religious
infighting, and other domestic unrest for the last few years, making for a long
list of potential perpetrators.
Speaking of long lists, the one with the name of troubled emerging
market nations has Brazil close to the top. The country is experiencing the
worst turmoil in decades, thanks to rising unemployment, surging inflation, a
collapsing currency, and a major political scandal that could lead to the
resignation of President Dilma Rousseff.
The iShares MSCI Brazil Capped ETF (EWZ) has lost a whopping
46% in the last year. In fact, it just undercut its panic low from late 2008,
putting it at the lowest level in more than a decade.
Lastly, the first two female soldiers in history are
graduating from the U.S. Army’s rigorous Ranger School. Soldiers who apply to
be Rangers face two months of intense mental and physical training, grueling
hikes, sleep deprivation, and more. However, the soldiers won’t yet be able to
join front-line infantry regiments because the Army has not opened them up to
full female participation yet.
Until next time, Mike Larson
Market Roundup Dow-33.84
to 17,511.34 S&P-5.52 to 2,096.92 NASDAQ-32.35 to 5,059.35 10-YR Yield+0.046 to 2.196% Gold-$2.30 to $1,116.10 Oil+$0.51 to $42.38
Source: Money and Markets
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