The Hard Data Behind Wednesday’s Stock Meltdown

Investor.com’s senior market analyst Joe Battipaglia discusses what’s driving this week’s economic data. The hard data behind Wednesday’s equity dive centered on one group: lower-income Americans and it’s a repeat of a pattern that…

The Hard Data Behind Wednesday's Stock Meltdown

Investor.com’s senior market analyst Joe Battipaglia discusses what’s driving this week’s economic data.

The hard data behind Wednesday’s equity dive centered on one group: lower-income Americans and it’s a repeat of a pattern that found a 19-year low in consumer confidence in January.

The nearly 22,000 respondents to the University of Michigan surveys reported consumer spending fell off dramatically over the past six months as wages failed to keep up with the cost of living. So, what is happening?

Last month, the nation’s benchmark corporate income tax cut shrunk the government’s massive accounting books by $82 billion over a 12-month period, costing state and local governments another $120 billion in tax revenue while stimulating a $114 billion increase in real GDP growth. It’s not clear how much actual market impact this has had, because we don’t have as detailed a financial statement as we used to, since we can’t take that change out in real time.

While Apple (AAPL) shareholders might not like it, Apple-specific issues have contributed significantly to the tepid performance of the broader S&P 500 in 2018. The performance is certainly not through altogether bad, as Apple, a symbol of the marketplace, is up 23% year-to-date, but it’s the firm’s financial health (of late) that has scared investors.

Because of “the stock market, supposedly something that is virtually always good for you and your savings” as the U.S. Census Bureau put it this week, shares of Apple are now “up 114.98% in price from their 2010 low, which only fueled concerns about economic growth, which Apple is a huge component of,” according to Deal Journal. Apple said this week its first-quarter profits rose 23% to $10.8 billion, though its sales failed to meet expectations.

So, if we take away from these next few days what we see on the economic data front – retail sales decline and lower-income incomes – the changes don’t seem to be all that bad. Many market watchers view it to be a head fake, as real-life economic data in the past year has shown consumers continued to rack up the requisite amounts of debt to fund their own purchases.

All of that said, there’s still some reason to believe there’s some power behind this period’s muted stock performance. First, as tax cuts are projected to provide a big boost in corporate profits – which in turn boosts bottom lines and sends stock prices higher – we’ve already seen a number of major corporations beat, or exceed, expectations on earnings calls in the past few weeks. On Tuesday, Pitney Bowes (PBI) said first-quarter earnings rose 12.5% and earnings per share beat expectations by 5 cents. On Tuesday, IBM (IBM) reported it earned $2.97 per share, beating expectations of $2.90.

Second, the stock market’s reluctance to rock the boat appears to be helping the economy. That means sentiment – which has been bubbling for a while now – can’t really get too far out of line with economic reality until real-world economic data becomes more conclusive.

With the new tax plan, corporations are already seeing some benefits, as the tax reduction in corporate tax rate to 21% from 35% was estimated to jump U.S. GDP by 0.2%. All of that helps companies, and the tax plan may also keep companies from adjusting their employee benefits and perks.

Overall, however, we don’t think the consumer slowdown as portrayed by the market – even the very modest rate of decline and -investors, should cause you to lose any sleep. The U.S. economy still remains fundamentally strong, though we think there are still market choppiness coming.

Investor.com is a digital platform where independent financial professionals provide analysis and actionable advice to their clients. The views expressed here are those of Investor.com and its authors and do not necessarily reflect the views of Strategic Investment Services Group. Investors can find more information about the firm, including historical performance, at www.Investor.com.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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