US stock investors pin hopes on retail therapy
US stock investors pin hopes on retail therapy
Good news on the shopping front could provide some potential catalysts for a stock market that has stumbled a bit of late.
The last two full weeks of earnings season are packed with consumer bellwethers. Macy’s is scheduled to report results on Wednesday, while Wal-Mart Stores Inc, the world’s largest retailer, will release quarterly earnings on Thursday, along with upscale department store Nordstrom and discount retailer Kohl’s. Home Depot, Target and Staples will follow the week after that.
Positive news about consumer spending could give the market some upward momentum, which has lagged since stocks wrapped up a strong July. The S&P 500 fell 1.1 percent this week — its worst weekly performance since June.
In the absence of strong earnings and economic data, however, analysts say the market is likely to trend lower as volume thins out heading into the latter half of August.
“We’re a consumer-driven economy, so if those earnings come in shy of expectations, the lack of personnel on Wall Street could certainly cause some weakness,” said Tom Schrader, managing director of US equity trading for Stifel Nicolaus Capital Markets in Baltimore.
Earnings on the whole have topped expectations, with 67 percent of the 446 companies in the S&P 500 that had reported earnings so far beating estimates. About 54 percent of companies have reported revenue above expectations, exceeding the average of the past four quarters, but below the historical average.
The consumer discretionary sector has tallied the second-best earnings growth of the 10 S&P 500 industry sectors, with 8.5 percent growth in the second quarter, according to Thomson Reuters data. Consumer staples have been weaker, with earnings growth at 3.8 percent for the second quarter.
Consumer spending has been restrained by an increase in taxes at the start of the year, but it is expected to accelerate during the second half. Growth in the S&P 500’s consumer discretionary sector is second only to the technology sector in 2013; the consumer discretionary index has climbed 26.6 percent so far this year
Of the 13 S&P 500 companies scheduled to report next week, four are retailers.
“Any commentary coming out of these late-filing retail companies is going to be interesting,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
“We’re shifting back to a little broader perspective on how the economy is doing, how the consumer feels, and how that feeds back into GDP.”
Despite the stock market’s pullback in the latest week, analysts say sentiment about equities remains positive. US-based stock funds marked their sixth straight week of inflows in the week ended Aug. 7, while US-based Treasury bond funds suffered a record outflow of $3.27 billion, according to Lipper, a Thomson Reuters company.
For the year, the Dow Jones industrial average has advanced 17.7 percent and the Standard & Poor’s 500 Index has climbed 18.6 percent. The Nasdaq Composite Index has gained 21.2 percent for the year.
In addition to earnings, the coming week’s numbers will include consumer spending and sentiment figures.
The economic data will include a reading on inflation, measured by the US Consumer Price Index.
On Tuesday, the Commerce Department will release data on July retail sales.
The forecast is for a 0.3 percent gain since June, with a 0.4 percent rise expected when car sales are excluded, according to economists polled by Reuters.
July CPI will be released on Thursday. If the CPI figure comes in between 2 percent and 2.5 percent higher year-over-year, the Fed is likely to take the data as a sign that it can start trimming its stimulus as early as September, said Keith Bliss, senior vice president at Cuttone & Co. in New York.
“If it comes in lower than 2 percent, then I actually think you’ll see the market rally on the news because then people will say ‘OK, they aren’t going to taper,’” he added.
Economists polled by Reuters have forecast that July CPI, on a year-over-year basis, will show a gain of 2.0 percent.
The Thomson Reuters/ University of Michigan consumer sentiment index will be released on Friday, with a preliminary reading for August.
Expectations are for a small uptick. The consumer sentiment index hit a six-year high in July on increased optimism about the current economic climate.
“We are starting to get consumer confidence numbers rising, which is very normal in a rising stock market,” said Leo Kelly, managing director and partner in HighTower’s Kelly Wealth Management in Hunt Valley, Maryland.
“We have seen gas prices level off, which is a positive, but mortgage rates are up, and we saw the number of refis go down significantly, so that’s less cash in the consumer pocket.”
2 years on, Brexit vote has taken a toll on UK economy
- Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals
- The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum
LONDON: While it’s still unclear what Brexit will look like when it happens next year, the decision to leave has already had a clear effect on the economy: households are poorer, companies are more cautious about investing, and the property market has cooled.
In the two years since the vote to leave the European Union, Britain has gone from being a pace-setter among the world’s big economies to falling into the slow lane. And the uncertainty over what relations with the EU will be when Brexit becomes official on March 29, 2019 could make matters worse.
Prime Minister Theresa May’s Conservative government remains split on what those relations should be. There are those who favor a “hard Brexit,” a clean break that takes Britain out of the bloc’s free trade union but also gives it more freedom to strike new trade deals around the world. Others want to keep Britain as close as possible to the EU, Britain’s biggest trading partner, which could mean it has to obey more of the bloc’s rules.
Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals.
“Thousands of skilled, well-paid jobs are now on the line because of the shambolic mess the government have created over the Brexit negotiations,” said Darren Jones, the lawmaker for the community where Airbus has its plant.
Before the referendum of June 2016, the British economy had been one of the fastest-growing industrial economies for years. Now, it’s barely growing. In the first quarter of this year it expanded by just 0.1 percent from the previous three-month period, its slowest rate in about five years.
For most people, the first and most noticeable impact was the drop in the pound. The currency slid 15 percent after the vote in June 2016 to a post-1985 low of $1.21. That boosted prices by making imports and energy more expensive for consumers and companies — the rate of inflation hit a high of 3 percent late last year.
The weaker pound helped some companies: exporters and multinationals that do not sell mainly in the UK But it hurt consumer spending and businesses that depend on their shopping. The retail industry was hit hard, with high-profile companies like Toys R Us and Maplin going bust, and supermarket chain Marks and Spencer planning deep cuts.
While prices rose, wages lagged, even though unemployment is at its lowest since 1975, at 4.2 percent.
“After Brexit, prices definitely went up,” said Nagesh Balusu, manager of the Salt Whisky Bar and Dining Room in London. “We struggled a bit earlier this year, so now we’ve increased the prices.” The bar is next to Hyde Park, a popular destination for foreign visitors. “The tourists have a good exchange rate. They know they can spend a little bit more than they usually do. But the locals are coming a little less. They are starting to think about how much they spend.”
The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum.
The real estate market, meanwhile, has cooled considerably, with the number of property sales in London near a historic low last year, according to estate agent Foxtons.
While some foreign prospective buyers were attracted by the drop in the pound, others seem to have been scared off by uncertainty over what Brexit might mean for their investment.
House prices are stagnating after years of gains, also due to expectations that the Bank of England will keep gradually increasing interest rates.
Nic Budden, Foxton’s CEO, predicts that the real estate market will remain challenging this year, while Samuel Tombs, analyst at Pantheon Economics, predicts that house prices will flatline for the next 6 months.
Against the backdrop of uncertainty, businesses have become more reluctant to invest in big projects. Because Brexit could lead to tariffs on EU imports of British goods, companies are hesitant to spend big on British plants and office space before they know what the new rules will be.
Benoit Rochet, the deputy chief of the port of Calais, the French town across the Channel from Britain, complained to a parliamentary committee this month that “we know there is Brexit but we don’t know exactly what Brexit means.”
“You are not alone,” responded the Conservative chair of the committee, Nicky Morgan.