Stock Market’s Story of the U.S. Consumer Siesta Ahead

Why is it that we can buy Wal-Mart stock for the same price today as we could have in 1999? We certainly know Wal-Mart is making a lot more money today than it did back then. But, here we are, seven years later, and the shareholders of Wal-Mart have failed to see profits on their stock.

Wal-Mart, at least to me, is much more than a stock. The company is the world’s largest retailer. Last year’s sales were a mind- boggling $315 billion. Depending on whose research report you believe, Wal-Mart accounts for between 7% and 8% of all U.S. sales.

To me, Wal-Mart is a gauge of U.S. retail sales. It’s quite common to see the stock of Wal-Mart move up or down depending on retail sales figures coming out of the U.S. It’s also been quite common of late to see Wal-Mart shares get “hit” when oil prices spike. The company itself has commented on how higher gas prices are negative for the company, because customers who live further away may reconsider their trip to a Wal-Mart location if it gets too expensive to get there.

If Wal-Mart is a leading indicator of how well or how poorly the U.S. retail market is faring (and I believe Wal-Mart represents the U.S. retail industry quite well), we can assume the price action of Wal-Mart stock is negative for U.S. retail sales. I believe Wal- Mart stock is saying there is a problem somewhere ahead for retail spending.

The other day I wrote about how U.S. new home builder stocks are down almost 50% in the past year–a negative indicator for the U.S. construction and new-home industries. Couple this with poor performance we are seeing from Wal-Mart stock and one can only wonder if the U.S. economy is headed for some kind of consumer siesta.

It’s all quite obvious to me: By the summer of 2004, Greenspan had brought interest rates too low. Consumers borrowed their hearts out. Now the Fed has raised interest rates too high, too fast, and consumers simply can’t keep up with their payments. We can see all this in the price action of stocks that benefit from consumer spending or suffer when consumers pull back on their spending. Too bad most investors can’t see these clear signs, because if they did, they would be unloading consumer sensitive stocks instead of waiting for these stocks (home builder and retail stocks in particular) to move up again. “Again” might not happen for some time to come.