What used to be a leading indicator, the stock market has now become a lagging indicator. For months (in these pages), I have written about how sick the U.S. economy has become. Stock market investors are waking up to the reality that world economic growth is either non-existent or even contracting—albeit too late.
The Dow Jones Industrial Average is now solidly in the red for 2015, down 832 points since the beginning of the year, or 4.7%.
For the past couple of years, I have written about how the Federal Reserve’s paper money printing program was not helping the economy; it was just making the rich richer. I have written article after article on how American consumers had not recovered from the Credit Crisis of 2008. Recently, I wrote about how China’s decision to lower the value of its yuan is deflationary for America. And I have written extensively on how the weak global economy was hurting U.S. multinational companies.
The reality of the situation is starting to hit the once-favored American big-box retailers as they report they are struggling.
For Macy’s, Inc. (NYSE/M), second-quarter earnings were down 25% from the second quarter of 2014. (Source: Macy’s Inc., August 12, 2015.) The future doesn’t look bright for Macy’s. It lowered its 2015 guidance.
Wal-Mart Stores Inc. (NYSE/WMT) has been posting weak earnings and sales growth, and investors are punishing the company as a result. Below is a chart of Wal-Mart’s stock price since 2013. You will see the stock started collapsing right at the beginning of 2015.
Chart courtesy of www.StockCharts.com
American Manufacturers Failing to Sell
Another indicator of the health of the U.S. economy is that inventories and sales at manufacturers also suggest a huge problem at hand.
In June, manufacturers in the U.S. economy had inventories worth $1.81 trillion, three percent higher than the same period a year ago. (Source: U.S. Census Bureau, August 13, 2015.) When an economy is growing, inventory flies off the shelf. When it’s soft—like the U.S. economy is now—inventory builds.
The inventory to sales ratio (total inventories divided by total sales) now stands at 1.37. The last time the ratio was at this level was back in 2009!
As Goes Consumer Spending, So Goes the U.S. Economy?
I keep talking about a U.S. recession in late 2015 to early 2016 because consumer spending, which makes up 68.4% of U.S. gross domestic product, is very soft, likely contracting here in the middle of the third quarter. (Source: Federal Reserve Bank of St. Louis, last accessed August 17, 2015.)
With investors pulling so much money out of the stock market, they are starting to see the writing on the wall for the U.S. economy. That writing is in red.