by Shawn Narancich, CFA
Vice President of Research
Black Friday? Unexpected comity by politicians aiming to avert the U.S. fiscal cliff put investors in a better mood ahead of Thanksgiving, and enthusiasm for stocks carried over to a holiday shortened trading session on Friday. After several weeks of post-election malaise and with just 39 days left to resolve the automatic spending cuts and tax increases slated to take effect January 1, stocks rebounded 3.5 percent on the week as benchmark Treasury bond prices waned.
Sparsely populated trading desks and light volumes signaled a start to the Christmas selling season, when shoppers thronged storefronts ahead of late night openings designed to create buying frenzies and fat retail profits. While investors will parse initial reports of Black Friday sales for indications of company-specific success or failure, the end game is harder to predict nowadays. With increased use of the internet and more stores offering online deals to rival in-store specials, more shoppers are choosing to sleep in and avoid the crowds, opting instead to make purchases on their computers, tablets, and smartphones. As a result, online sales continue to take market share from bricks-and-mortar retail. Inasmuch as shoppers visit Amazon.com or Target.com instead of venturing out, traditional retail could be losing out on the all-important impulse purchase. Retailers like Wal-Mart and Macy’s count on these and other full-priced sales to make enough money to offset losses incurred on their “door buster” specials. So while holiday sales may reach the 4 percent gains anticipated by investors, we won’t know until much later in the season how promotional these added sales turned out to be.
From Bad to Worse In a relatively light week of corporate news, disappointing earnings from Hewlett-Packard sent more of its investors fleeing for the exits. Quarterly earnings beat estimates, but only after excluding a laundry list of non-recurring charges, the most significant of which was an $8.8 billion write-down of the goodwill it booked in purchasing U.K. software firm Autonomy. Amid allegations of accounting impropriety, investors were left to believe that former CEO Leo Apotheker and his management team were duped into the purchase, leaving current CEO Meg Whitman to pick up the pieces of a company whose stock has now lost over half its value this year. Ironically, reported sales of software represented the only division of sales growth within HP, but even at that, this business accounts for a small portion of overall sales. Looming as much larger issues standing in the way of an HP turnaround are declining sales of PC’s, servers, storage, printers and ink. Technology trends favor tablet computing, smart phones, and virtualized workloads accessed in the cloud, leaving HP to face secular headwinds that show no signs of abating.
An Asian Bright Spot Investors have had to take recent economic data in the U.S. with a grain of salt, as the effects of super storm Sandy continue to skew readings of weekly unemployment claims, retail sales, and industrial production. As a result, foreign data flow has become more meaningful in gauging global economic health. Notwithstanding the occasional nugget of good news, Europe continues to be a macroeconomic problem, as evidenced by last week’s data confirming that the Continent is officially in recession. As lawmakers there attempt to cobble together the latest bailout package for Greece and wrangle over a new EU budget for the next seven years, trading partner China appears to be rising above the fray. Amid data showing stronger electricity demand and better industrial production numbers, a preliminary reading of Chinese purchasing managers now indicates manufacturing growth there for the first time in 13 months. What all of this could indicate is that the Red Giant may end up being a savior of sorts for economic growth next year. If China can continue its nascent transition to a more consumer oriented economy, global growth in 2013 could actually reach the 3-4 percent level that many economists expect.
Our Takeaways from the Week
- Stocks rebounded amid optimism for a solution to the impending fiscal cliff
- While the global economy remains lackluster, China’s expansion appears to be picking up and could help deliver anticipated global growth in 2013