Showing signs that the 2009-2014 bull market has disintegrated, the Dow Jones Industrials lost another 149 points, ending at 15,698, down 878 points from its Dec. 31, 2013 record high of 16,576 or 5.5%. What concerns investors is not Wall Street’s right to take profits but prospects for more volatility going forward where short-selling hedge and private equity funds take over markets. While earnings begin to trickle in, Wal-Mart Inc. cut its Q-4 estimate with slow retail sales in domestic and global businesses. Wal-Mart analysts claim that many of its low-income customers have less disposable income because of the U.S. government’s $5 billion cut to the Food Stamps program. Showing that the retail weakness extends to the Internet, the world’s biggest online retailer Amazon.com also reported lower-than-expected fourth quarters earnings causing a sell-off in emerging markets.
While everyone jumped for joy yesterday when the Dow moved upward nearly a 100 points, global traders see the overall trend as a broad-based sell-off or correction. Just how far the correction will go is anyone’s guess. Some bearish market analysts like Wells Fargo’s Gina Martin Adams predicts a 50% correction, rivaling the epic meltdown in the 2007-10 recession that took markets down from its Oct. 9, 2007 peak of 14,198 to its most recent bottom March 9, 2009 of 6,547 or a 55% drop. Looming over markets is the Federal Reserve Board’s “tapering” of its once $85 billion monthly bond-buying program, now down to $65 billion thanks to retiring Fed Chairman Ben S. Bernanke’s parting shot Jan. 29. Handing the baton to his 67-year-old Vice Chairman Janet Yellen, Monday, Feb. 3, markets have begun to disintegrate under what looks like a tighter monetary policy.
News of Wal-Mart’s decline hints at slower growth ahead, signaling that today’s inflated share prices need to come down. “We have some reorganization within the global finance organization,” said Wal-Mart spokesman Randy Hargrove, muting the dire tone that’s swept through Wal-Mart in particular and retail industry in general. When Amazon.com parallels slower retail Intenet sales, it sparks concerns domestically and in manufacturing hubs like China and India. “Wal-Mart caters to lower-income consumers which have been hit disproportionately hard,” said Morningstar analyst Ken Perkins, referring to a cutback in the government’s food stamp program. Perkins also said Wal-Mart is looking at contracting its Brazilian operations where it intends to close up to 25 small and midsize stores. Wal-Mart’s New Delhi-based operation in India, Wal-Mart Pvt. Ltd., also looks anemic.
When mass merchandisers watch their sales shrink, it has a ripple effect in emerging markets continuing to weigh on the Dow, Nasdaq and S&P 500, all dependent of cheap foreign labor markets. Spelling trouble for Yellen’s monetary policy is the government’s report that the economy grew at 3.2% in the fourth quarter. Increases in Gross Domestic Product “cements the conclusion that U.S. economic growth has finally accelerated from fair to good, and provides evidence that this acceleration will continue,” said Doug Handler, chief U.S. economist for HIS Global Insight. Government stats don’t take into account the current slowdown in China and emerging markets, promising to reduce future GDP growth. Looming in the background is the U.S. housing market that rebounded in 2013 but shows signs of slowing in 2014 that will negatively impact employment and GDP growth.
Fed critics, largely conservatives, have wanted the Fed to pull the plug on quantitative easing to help reduce U.S. debt. With another debt-ceiling battle looming next month, reducing QE3 could boomerang by slowing the economy. Driving up interest rates over one percent since May 2013, the housing market has already seen a slowdown that could eventually slow GDP growth. So much of Fed’s action look at old data, especially the unemployment rate and GDP number. If Wal-Mart and Amazon continue to show sluggish consumer demand, unemployment and GDP could head south quickly. “The majority of the U.S. economy is based on the consumer,” said Chris Mulumphry, chief fixed-income investment officer at Franklin Templeton Investments. “It was solid—not gangbusters, but solid,” concerned that things could change quickly if Yellen continues to tighten.
All parts of the U.S. economy are interconnected, including consumer spending, the housing markets and retail sales. A slowdown in any sector could adversely affect GDP growth and unemployment. If the current stock market correction continues, publicly traded and privately held companies could start laying off workers with a slowdown in demand, or, at the very least, stop hiring. When Mulmuphry talks about consumer spending accounting for over two-thirds of GDP growth, he’s not kidding. Wal-Mart and Amazon.com’s recent numbers hint at slower GDP growth and possibly higher unemployment. Before it’s too late, Yellen must recalculate the pace of tapering before it slows down the economy. Worries about the Fed’s QE3 causing more inflation haven’t panned out. Keeping consumers spending requires more stimulus, low interest rates and less tapering.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.