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VERSACE: June’s weak numbers could make for a bleak July

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ANALYSIS/OPINION:

By now, you probably have heard that the stock market fell 3.3 percent over the April-to-June period as measured by the S&P 500 because of fears of slowing global growth and uncertainty in Europe.

Even though European leaders hinted last week that they have stitched together an iffy plan, which sparked a last-minute June stock market rally, indicators received in early July confirm that the sluggish economy has continued. While there is the occasional sign of hope - such as May's better-than-expected 0.7 percent increase in domestic factory orders - there have been more troubling signs, such as the falling index for supply managers for June. That index marks the first reading below the 50 percent line indicating expansion or contraction since July 2009.

The domestic economy's June dip was confirmed by the U.S. Spending Monitor from Discover Financial Services, which showed that consumer confidence dropped 4.8 percentage points to 90.7, its lowest levels since the start of the year. June's monitor finds that consumers saw worsening personal finances and economy, leading to lower spending plans, specifically on discretionary purchases. More specifically, the June monitor revealed:

• More than half of respondents rate the U.S. economy as poor, a 3-percentage-point increase since May and the highest level since January.

• Nearly half (48 percent) of consumers expect spending on major personal purchases such as vacations to be lower in July, a 6-point increase since last month.

• Nearly half (47 percent) of consumers expect to spend less in July on discretionary purchases, such as going out to dinner or the movies.

Considering that consumer spending in one form or another accounts for nearly 70 percent of the domestic economy, Discover's latest findings signal a bumpy road ahead. Also confirming those dour findings, the Gallup Economic Confidence Index fell to minus 22 in June, down from minus 17 in May and reverting to the minus 22 recorded in February - more signs that the domestic economy is stalling if not falling behind.

But it is almost certain that the most important economic indicator this year has been and will be that for job creation.

Despite all the talk about the number of jobs that have been created since President Obama took office, a closer look at jobs data from the Bureau of Labor Statistics reveals a sharp slowdown on the jobs front. Only 246,000 non-farm jobs were created in the second quarter, compared with 677,000 non-farm jobs created during the first three months of the year, according to the federal government's Bureau of Labor Statistics.

What's worse, the labor force has continued to shrink over the past several months with more than 2.3 Americans effectively exiting the labor force over the past 12 months. With the additional burden on small and midsize businesses as a result of the Supreme Court's ruling upholding Obamacare, those hoping for a quick rebound in job creation are likely to be disappointed.

During the last weeks in June, a number of companies - including Procter & Gamble Co., Best Buy Co. Inc., O'Reilly Automotive Inc., AK Steel Corp., FedEx Corp., Family Dollar Stores Inc. and Nike Inc. - have warned of weaker-than-expected results or adjusted their outlooks in a downward fashion. This does not inspire a lot of confidence in the earnings season that will kick off Monday when Alcoa Inc. shares its quarterly results. Characteristic of most corporate earnings seasons, the number of reports will trickle in and then several days in we will be hit with a landslide of companies reporting second-quarter results.

If what we have heard thus far is any indication of what is to come, fasten your seat belts as it's going to be a bumpy ride.

While some investors like to close their eyes and shut their ears once they have made their stock selections, that is simply foolish behavior. Competitors, customers and suppliers of the companies in which we invest provide timely, crucial information that helps give confirmation or warning when our held companies report their results. When it comes to your money, it's always best to pay attention.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @_chrisversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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