Examining the Redbook and the ICSC-Goldman Sachs Retail Indices (Part 7 of 10)
A decline in the gross domestic product Last week’s results were mixed. However, a year-on-year comparison shows a recovery in both the Redbook and the ICSC-Goldman Sachs Indices. During the recent releases by the Bureau of Economic Analysis, the U.S. gross domestic product (or GDP) has declined at 2.6% in the fourth quarter 2013 due to bad weather conditions, after a surprising 4.1% annualized rate increase in the third quarter. As a result, the decline has largely impacted the companies such as Wal-Mart Stores, Inc. (WMT), which last month trimmed its profit forecast as unemployment kept many customers away from increasing spending. The company also reported its 14-week comparable sales data for January, 2014. E-commerce drove the sales, but on net, basis the comparable sales declined by 0.4%, as the Wal-Mart U.S. comparable traffic decreased by 1.7%, meaning fewer customers visited the store for the shopping. The company’s chief executive office, Holley said, “Some of the factors affecting our consumers include reductions in government benefits, higher taxes and tighter credit. Further, we have higher group health care costs in the U.S. Given these factors and the ongoing headwind from currency exchange, we expect to be toward the low end of the net sales guidance.” A week later, Target Corp (TGT) posted its fourth quarter fiscal year 2013 earnings, which showed a decline of 2.5%, as data breach adversely impacted its operations with a loss of consumer confidence and spending. An increase in consumer spending implies that the economy is expanding and vice versa. For stocks (SPY), a strong economic growth translates into healthy corporate profits and higher stock prices as reflected in the SPDR S&P Retail ETF (XRT). However, the bond markets (AGG) usually suffer. Other factors remaining constant, an increase in business activity would mean the Fed would continue with its tapering of monthly asset purchases (currently at a pace of $55 billion a month), which would reduce liquidity, and in turn, raise interest rates, causing the bond prices to fall. The reverse would hold true for a decrease in consumer spending.
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