by Shawn Narancich, CFA
Vice President of Research
Irrational Exuberance? Stocks notched another week of gains as earnings season waned and news flow slowed to a trickle. Even more notable than the 1 percent increase posted by large-cap U.S. stocks this week was the fact that their European counterparts have now risen for 10 consecutive weeks—the longest winning streak in six and a half years. Lest an investor be tempted to think that the nexus of worry in Europe has passed, this week brought more evidence that the Continent is in recession, with German industrial production declining again, Italian GDP declining by almost 3 percent annually and England posting its largest trade deficit ever. To the east, China’s economy continues to weaken. Specifically, their industrial production growth is decelerating, retail sales are growing at a slower pace and Chinese exports actually fell in July. Against this macroeconomic backdrop, the inflation rate has declined to just 1.8 percent, leaving China’s central bank with plenty of leeway to cut interest rates again. For now, the surfeit of global liquidity and anticipation of more to come is supporting the equity trade and causing less risk-averse investors to lighten their allocation to bonds. Benchmark 10-year Treasuries finished the week with small losses, pushing yields up to 1.66 percent.
Exports to the Rescue What was surprising to see domestically was the resilience of trade statistics. A dip in crude oil costs underpinned a drop in imports which, when combined with record exports in June, cut the nation’s trade deficit to the lowest level in 18 months. This upside surprise could cause economists to boost their estimate of second quarter GDP, a number that was first reported a couple weeks ago to have expanded at just a 1.5 percent annual rate. Investors will get a better feel for U.S. economic progress next week when the Census Bureau releases July retail sales numbers and inflation statistics.
A Stroll down the Retail Aisle While most U.S. companies have already released their second quarter earnings reports, retailers have just begun. Macy’s headlined results this week by reporting better-than-expected earnings growth of 22 percent on low-single digit same-store sales growth, while raising estimates for the fiscal year. Contrast this encouraging result with J.C. Penney, where same-store sales fell 22 percent in a quarter that witnessed the company’s second consecutive loss. Former Apple executive and current Penney CEO Ron Johnson may want his company to become “an entirely new class of department store,” but today’s results show that the J.C. Penney makeover is far from complete. As for department store rival Kohl’s, they made money in the second quarter, but same-store sales, gross margins and earnings all fell from year-ago levels. The conclusion here is clear: Macy’s is out-merchandising its peers and taking their market share.
Our Takeaways from the Week
- The dog days of summer have arrived on Wall Street
- Stock prices remain firm on expectations for more monetary stimulus globally