The Talking Heads

by Shawn Narancich, CFA Executive Vice President of Research

A good indicator of financial markets adjusting to a slower rate of news flow is the frequency with which the same stories are replayed and debated in the financial press and on television. With retailers now wrapping up second quarter earnings season, Wall Street strategists and commentators have resorted to debating ad nauseum what will happen to short-term interest rates once the Fed ends its program of quantitative easing. Minutes of the latest Fed meeting this week revealed that the Fed will remain data dependent, letting incoming economic reports and anecdotal Beige Book reports tell the story of progress for the economy in general and for the labor markets and inflation in particular.

On the latter topic, policy makers received reassurance this week that inflation is not presently a problem, as headline CPI numbers came in spot-on with the Fed’s 2.0 percent target. Tame inflation indicates that labor markets, absent select areas in energy and manufacturing, still contain the sufficient slack necessary to boost output without spurring a wage spiral. As the old saw says, time will tell. In the meantime, investors seem to be tuning out the chatter as they bid equities to new record highs.

Like Sands Through the Hour Glass. . .

Believe it or not, we’re now halfway through the third quarter and, once again, the error of estimates appears to be on the downside with regard to economic growth forecasts. While this week’s housing statistics were encouraging, with July new housing starts up 16 percent sequentially, a key fly in the ointment was last week’s retail sales report, which came in flat with June numbers and continued a disappointing trend of sequentially slowing retail sales since May. At a time when international headwinds are increasing thanks to Europe teetering just above stall speed and China continuing to undergo a growth-slowing transition away from excessive investment, our forecast for 3 percent GDP growth domestically is starting to feel just a bit optimistic.


As tempting as it might have been to write-off last week’s poor retail sales report as a statistical anomaly when juxtaposed against increasingly positive employment numbers, considerable anecdotal evidence from retailers reporting fiscal second quarter numbers affirms the data. Two key bellwethers of American retailing – Wal-Mart and Target – both reported earnings declines on moribund U.S. sales, and investors have consistently overestimated the companies’ earnings power over the past six months. In addition, Macy’s surprised investors by uncharacteristically missing numbers and lowering sales guidance. Alas, this week brought some better news on the retailing front, with Home Depot reporting strong sales and earnings coupled with a boost to their full year earnings forecast. In contrast to the drubbing that Macy’s took, stock of the home improvement leader broke out to new all-time highs. Similarly, off-price merchandisers T.J. Maxx and Ross Stores both outperformed Wall Street expectations and were accordingly rewarded by investors. With retail earnings reports nearly wrapped up for the quarter, we observe that results are hit and miss, and that investors are best served to take a rifle shot approach to owning specific names advantaged by key trends in retail.

Our Takeaways from the Week

  • Stock prices remain resilient despite mixed economic data and geopolitical turmoil globally
  • Retailers are book-ending another quarter of better-than-expected earnings in general, though one with more cross-currents below the surface