Market Roundup
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If you’ve stepped foot in a Nordstrom (JWN) store before, you know it targets higher-end customers. They were supposed to be relatively immune to some of the challenges facing other Americans.

But late yesterday, the Seattle-based department store dropped a massive earnings bomb on Wall Street. It reported fiscal third-quarter net income of 57 cents a share after adjusting for items. That missed forecasts of 71 cents by a mile. Sales of $3.33 billion also missed targets and the company cut its full year outlook.

Worse, the company couldn’t isolate one specific, easily solved problem for the weakness. It said traffic and sales were generally weak in all categories and all parts of the country. Both online and brick-and-mortar results disappointed. The stock plunged 15% to its lowest level in 21 months.

Then there was Fossil Group (FOSL), the watch and accessories store. Its earnings tanked 45% from a year earlier.

The retail rout continues …

What’s more, the company warned that sales would plunge as much as 16% in the current quarter. Per-share profit may come in as low as $1.05 — half of analyst expectations. The stock dropped more than 36%, the lowest in almost six years.

These aren’t isolated cases, either. We already saw Macy’s (M) and Wal-Mart Stores (WMT) disappoint as I covered recently. And today, we got lousy economy-wide figures from the Commerce Department.

Overall retail sales rose just 0.1% in October compared with estimates for a gain of 0.3%. September’s figure was also revised down to unchanged from positive-0.1%. A “core” reading of sales growth that is used to compute GDP figures also came in at +0.2%, half the 0.4% gain economists were expecting.

So what is going on? Is job and wage growth weaker than it appears at first glance? Is the boost to discretionary spending from lower gas prices being offset by higher out-of-pocket costs elsewhere, such as rent and health care? Is Amazon.com (AMZN) just stealing everyone’s business and turning U.S. malls into ghost towns?

Analysts and economists have been trying to divine an answer for more than a year now.

A New York Post story from February postulated that rising health-care costs are part of the problem. It cited a study by PricewaterhouseCoopers that projected health care costs to rise by almost 7% this year.

The Kaiser Family Foundation concluded in a separate study that average premiums rose a more modest 4% this year for employer-sponsored health insurance. Single workers are now paying around $1,071 while family-plan employees are paying $4,955.

But out-of-pocket costs for deductibles and co-pays are rising sharply. The average deductible for single coverage has jumped 44% in the past half-decade to $1,318, while wages have risen only 10%, per Kaiser. CEO Drew Altman explained the dilemma by saying: “The slowdown in health-care cost growth has been all but invisible to average consumers because their out-of-pocket costs have been rising at a time when their wages have been relatively flat.”

This summer, Goldman Sachs economists also weighed in on the lack of a retail spending boost from falling gas prices. The firm concluded that lower prices weren’t boosting spending because less well off Americans were using the extra scratch to boost savings or pay down debt.

Then there’s the fact the U.S. has become much more of an energy- producing nation in the past few years. So what low gas prices may giveth to some consumers, it taketh away from others by spurring massive layoffs and plunging investment in energy and related sectors. As one economist said in a recent Los Angeles Times story: “The benefit of lower oil prices is less pronounced than, say, 10 years ago … You’re taking a big engine of economic activity and cutting it sharply.”

“It’s hard to argue that relative strength in online is enough to outweigh the dismal performance of offline.”

As for Amazon.com, its share price has been soaring while shares of traditional retailers have been falling. A handful of stories like this one postulate that Amazon has been stealing everyone’s lunch money. And so-called “non-store” sales — a category that includes, but is not exclusively limited to, online business — did increase at a 1.4% rate.

But online sales still only account for around 7.2% of total retail sales, according to the Commerce Department. So for the broader economy and the stock market overall, it’s hard to argue that relative strength in online is enough to outweigh the dismal performance of offline.

Lastly, look at how investors are reacting to retail firms that disappoint. These stocks aren’t just experiencing gentle corrections. They’re getting absolutely crushed. Just punch up a weekly chart of JWN or M or FOSL and you’ll see these are the kinds of wipeouts we haven’t seen since the last recession and bear market.

Is that another warning sign that the bear may be back? You bet! So I think caution, cash-raising, hedging, and targeting downside profits in vulnerable companies (like I’m doing in my Interest Rate Speculator is a smart course of action.

Now I want to hand you the floor. What do you think is responsible for round two of retail carnage? Are we in for a rough holiday shopping season? Or will strength in online shopping offset weakness in offline? Are these retail sell offs a problem for the broader markets? Or will they stay bottled up in the sector? Hit up the Money and Markets website and let me know your current thinking.

Our Readers Speak

The ongoing, sharp declines in the price of multiple commodities were the lead subject over at the website in the last 24 hours. So let’s get right to the comments.

Reader David said the meltdown is a harbinger of worse things to come. His view: “The commodity slide is just the beginning, as was the drop in farm prices in 1923. Too much capacity, sluggish demand and poof, economies collapse worldwide.

“With prices falling, folks postpone purchases, as in Japan for 20 years. Just watch this Christmas season as sales flop till the January markdowns. Oh my, what a rout it’ll be.”

Reader Richard S. also struck a gloomy tone, saying: “I believe we’re in for one of those Black Swan events, where many markets across the globe get trashed together. I blame the debt implosion starting in Europe and the emerging markets … along with junk bonds, especially financing the fracking and oil patch … along with the $1trillion in auto loans and $1 trillion+ in student debt.”

On the other hand, Reader Tommr pointed to some of the positive side effects of lower resources pricing:

“Low and falling commodity prices? Great! The cost of making and building everything is much cheaper. The cost of transporting everything is much cheaper. The cost of consumption is much cheaper. What’s not to like? It’s the same story with the ‘strong’ dollar. The cost of inputs is much cheaper. All positives!”

So what can be done about it? Reader Broomy suggested a few fixes for lackluster growth: “I know free marketers don’t like to hear it, but maybe we should put money into the hands of people who will spend it. Maybe raise the minimum wage, where every dime will be spent, and through the magic of the multiplier, it just might get things moving again.

“Or do some serious investment in infrastructure, and tax those of us who can afford it to pay for it. That would create a lot of economic activity, and maybe we’d get paid back in the form of increasing corporate profits, not to mention that we might not have to sit in traffic as much as we do.”

Thanks for the input everyone. I’ve had serious concerns about global growth for a while now — and the ongoing slump in commodities seems to confirm those worries are on point. That slump is also a negative for risk assets like stocks.

So what about solutions? Well, given a choice between more QE, even more negative interest rates, or other equally ineffective monetary actions … and a serious infrastructure investment program, I’d definitely go with investment. But the political willpower for the latter is lacking, so for now, it just isn’t going to happen regardless of whether it’s the better option.

Any other points I haven’t covered? Then use this link to let me hear about it.

Other Developments of the Day

● Europe’s economy grew 0.3% in the third quarter, down from 0.4% in the second quarter and missing forecasts by a tenth of a percentage point. Exports were a key weak link.

That’s ironic, since the European Central Bank has done everything it can to weaken the euro via Euro-QE. It appears lousy demand from overseas countries in turmoil (China, Latin America, etc.) is overwhelming the impact of euro weakness.

● The International Energy Agency piled on the oil market, saying that global supplies have swelled to a record 3 billion barrels. But it also said a modest bump in demand and a decline in U.S. and foreign, non-OPEC production should help shrink that surplus next year.

● The U.S. attempted to kill ISIS member Mohammed Emwazi, or “Jihadi John,” in a Syrian airstrike. The British citizen was born in Kuwait, but has become one of ISIS’ most visible militants because he has appeared in several execution and propaganda videos.

So what do you think about retail — are online retailers poaching sales or are sales weak across the board? Will the oil glut ease as we head into 2016? Should Europe launch even more QE to stimulate its economy, and what impact will that have on markets? Let me know your thoughts at the website.

Until next time,

Mike Larson