by Shawn Narancich, CFA
Vice President of Research
My Idea of Growth Stimulus Is Different than Yours Stocks rose in Europe and the U.S. this week, breaking recent downtrends despite increasing evidence of slower global economic growth and continued existential threats to euro unity. Despite a 1.8 percent rise in the S&P 500, Treasuries remained well bid as the benchmark 10-year finished close to unchanged. An informal meeting of European heads of state earlier in the week failed to reach consensus on how to move the Eurozone past the Greek crisis, with liberal leaders supporting relaxation of austerity and the issuance of common Eurozone bonds while Germany’s Merkel remains firmly opposed. The European Union already has common monetary policy; the question investors increasingly want answered is whether it will also have fiscal unity. Merkel appears to be under increasing pressure to soften her stance, but with Greece’s liberal left thumbing its nose at the country’s latest bailout package and overwhelming support by Germans for Merkel’s tough-love policy, Greece may fall by the wayside before it sees the benefit of any Eurozone bond issuance. Germany’s idea of growth stimulus is to relax rigid labor laws that preclude companies from firing workers more freely and targeted tax incentives to attract investment, not further forbearance for Greece or relaxation of budget deficit targets.
Headwinds Mount As Europe festers, its economy appears to be slowing further, as evidenced by this week’s reported decline in the May Eurozone Purchasing Managers Index to its lowest reading in almost three years. Of note, Germany’s previously unassailable economy also took a hit, with its industrial figures contracting. The slowdown in Europe also appears to be impacting China; with exports to its largest trading partner pressured by weaker consumer demand on the Continent, its manufacturing indices showed contraction for the seventh consecutive month. Completing the circle of disappointing economic news was the U.S. release of non-defense durable goods orders ex-aircraft that fell for the second consecutive month. Increasing evidence of a global slowdown has moderated investors’ enthusiasm for tech stocks, as this sector has now ceded its sector lead so far this year to the consumer discretionary stocks. Somewhat surprisingly, tech stocks finished the week in positive territory despite notable earnings misses by Dell and a shockingly weak forecast by storage systems supplier Network Appliance.
Throw the Markets a Bone What worked this week? PetSmart, which reported 39 percent earnings growth on healthy same store sales comps and higher full-year earnings guidance. The stock rocketed 14 percent higher, affirming the notion that even in an increasingly uncertain economy, people still spend money to feed Fido. So with Dell, Cisco, and now Network Appliance all providing anecdotal affirmation of the disappointing durable goods report for April, investors are seeing evidence that mounting fiscal uncertainty domestically is starting to impact business behavior. With 221 days to the “fiscal cliff,” the Supreme Court’s pending decision on ObamaCare, and presidential and congressional elections this fall, unusually large doses of uncertainty appear to be weighing on the economy. We will see more evidence about how this dynamic is playing out with next week’s employment report, the domestic purchasing managers report, and additional housing data.
Our Takeaways from the Week
- European woes and fiscal uncertainty domestically are weighing on the global economy
- Despite the worries, we should all have a great Memorial Day Weekend