The week felt like “Friday the 13th” with headlines to match – weaker-than-expected global economic data, Brazilian President Dilma Rouseff’s looming impeachment trial and the retail sector’s fall in consumer spending. Read on to get inside details of this week’s key investor news…
Around the World in Economic Data – lots of data was released this week which, taken together, offers a mixed picture of global economic growth. The U.S. economy created 160,000 jobs in April, about 40,000 less than expected, keeping the unemployment rate at 5%. As has been custom for years now, the weaker-than-expected data caused many traders to recalibrate their bets on a Fed rate hike in June (we see this as likely). Overseas, Europe’s strongest economy, Germany, posted sturdy manufacturing numbers in March with orders up +1.9%—the biggest increase since last summer. As the summer months again approach, this is a good sign that the cyclicality of growth in Germany is back again. In China, trade data indicated more softening, with exports falling 1.8% from a year ago, and Q1 GDP growth was said to be the weakest in 7 years at 6.7%. Inflation in the world’s second largest economy was stable and solid coming in at 2.3%. Over all, this economic data shows an environment consistent with our expectations all year. We “muddled-through” growth, but growth nonetheless. And remember, stocks don’t need big growth rates to tick higher.
Impeached! – well, sort of. After a 20-hour long deliberation in the Brazilian Senate, it was decided that President Dilma Rouseff would be subject to an impeachment trial, during which she must step down as president. After she was removed from the presidential palace, she delivered two impassioned speeches defending herself and calling the trial decision a “coup” and an “injustice.” At the heart of the matter is whether she had any involvement in the multi-million dollar kickback scheme at the state-run oil company, Petrobras, where she served as chairwoman. More recently, there have been questions of whether she broke budgetary laws by borrowing from state banks to cover a shortfall in the deficit and to boost social programs ahead of her 2014 re-election bid. Brazil’s economy has been mired in recession for two years now and it stands to lose plenty more cash with the summer 2016 Olympic Games. To think, the Olympics could be going on while the former president is on trial for corruption and potential impeachment. Things have been better in Brazil, but maybe this is the shakeup they need to clean up corruption and pave the way for more open market growth.
Is Retail Sector Gloom a Bad Sign? – there has been an interesting trend occurring in the retail sector that we’re watching closely. On a positive note, consumer spending is rising and healthy due to incrementally rising wages and lower energy prices. On the negative side, retailers have been getting bruised lately, suggesting that consumers are spending in different sectors of the economy. On the earnings front, Macy’s (ticker: M) reported a steep fall in quarterly revenue of 7.4% year over year to $5.8 billion. Concerned over future spending expectations, it also cut its annual forecast for sales and profits. Gap Inc. (ticker: GPS) also reported an 11% drop in sales, but that’s not totally unusual for them—sales are notoriously volatile for the company. It would be one thing if it were just one company with a bad quarter here and there, but there seems to be a trend building that points to souring sentiment for future growth prospects:
To be sure, eCommerce and online shopping is reducing the need for brick and mortar stores, so closing a few makes sense in a lot of cases. But, the extent that stores are closing has caused aggregate sales to slow. We should be slightly concerned, and keep our eye on this.
With such a somber recap from the week, many investors are concerned about the overall state of the economy and what it holds for the future. But, we at Zacks Investment Management do not get caught up in gloomy news. Instead, we stick to the facts and always look to hard data to provide context for investing decisions. If you want to get an inside look into what we are seeing, download our newly-released Economic Outlook Report (May ’16) by clicking on the link below…
Disclosure