Last week, Wal-Mart Stores, Inc. (NYSE:WMT) spooked investors with the dismal news of weaker projected earnings. But what Wal-Mart disclosed was not only material to its shareholders; it also tells us the harsh truth about the U.S. economy.
The chart below shows just how devastating Wal-Mart’s negative earnings guidance was on its stock price. The WMT stock price plunged 10% in one day last week-one of the worst performing days in the company’s trading history. Billions of dollars in WMT market capitalization disappeared in a single day.
Chart courtesy of www.StockCharts.com
What Did Wal-Mart Say About the U.S. Economy?
As I have been harping in these pages, the U.S. economy is fundamentally tormented. I have argued consumer spending is anemic, corporate America is struggling, and companies are not investing in their businesses. Instead, companies are using their money (and borrowing, too) to buy back their stock.
Wal-Mart confirmed all this in one press release.
WMT expects its earnings per share to decline between six percent and 12% in its fiscal year 2017 (ending in January of 2017). (Source: Wal-Mart Stores, Inc., October 14, 2015.)
Don’t look at this decline in earnings in Wal-Mart as just negative news for WMT stock. Wal-Mart is the largest company by revenue in the world; it has two million employees. Sales at Wal-Mart account for about 10% of all retail sales in the U.S. and the company a gauge on consumer spending in the U.S. economy. When Wal-Mart struggles, it means consumer spending in the U.S. economy is slowing down.
Wal-Mart said its capital spending between its fiscal years of 2016 and 2017 is expected to decline by 14%. In the midst of all this, Wal-Mart said the retailer’s board of directors has authorized a new $20.0-billion share buyback program to be completed over the next two years.
So, Wal-Mart has chosen to buy back its stock as opposed to invest in its business. It’s not alone in making this decision. In the second quarter of this year alone, 75% of S&P 500 companies bought back their shares, amounting to $134.4 billion! (Source: FactSet, September 2015.)
U.S. Economy in Clear Trouble
The Federal Reserve thought that by printing more paper money, consumer spending—the biggest component of gross domestic product in the U.S. economy—would rise. This hasn’t happened. In fact, with earnings for companies like Wal-Mart contracting, it seems consumers are in poor shape.
In its most recent estimates for the U.S. economy, one member of the Federal Open Market Committee talked about negative interest rates. This is something we’ve never really seen. Don’t be shocked if either this or some other form of QE4 happens in 2016; Wal-Mart is telling us the economy needs help.