A Market Story That's Bigger Than Greece

 | Feb 21, 2012 | 10:30 AM EST
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Even though it was generally anticipated that the European leaders would succumb to the political pressure and bail out Greece, the news of a second Greek bailout failed to inspire markets. If you are surprised at the tepid market reaction, then you are failing to remember one very important thing: Markets are anticipatory creatures. A 10% advance in the S&P 500 so far in 2012 is in part due to the expectation that this bailout would occur. 

In true form, markets are now focusing on April, which is when Greece holds elections that will likely lead to a change in leadership. It's easy for lame-duck leaders to enter into agreements, but newly elected leaders are often invigorated by a chance to implement change. More so, many simply see this bailout as merely another round of electric shock to a dying patient. For now, disaster has been averted, and that will likely tone down volatility; but as for a huge move up, I would tone down my expectations, especially since an economic issue was revealed to the markets today that may bigger than Greece.

According to the World Bank, Greece's annual gross domestic product is about $300 billion. This morning, a $400 billion economy may have given signs of an upcoming slowdown. Wal-Mart (WMT), the planet's largest retailer, which has more than $400 billion in annual sales and is widely considered one of the best proxies of consumer strength and confidence in the U.S., did provide inspiring results. And while Greece's tentacles certainly reach economic areas that have an impact greater than $300 billion, investors may overlook an important market signal. 

Although Wal-Mart reported a 1.5% increase in same-store sales in the fourth quarter of 2011 over the year-ago period, its profits dropped 15% quarter over quarter. In order to win back consumers and boost sales, Wal-Mart has had to offer even lower prices. Initially, those lower prices may be good for consumers, but they aren't that great for the overall economy. If Wal-Mart's price reductions continue to affect its profitability, then it will do what any other business with that type of buying power would do: extract better terms from suppliers. That's not good news for Procter & Gamble (PG) and other massive suppliers. When Wal-Mart sneezes, many of its suppliers are liable to catch a cold. 

Later this week, Dollar General (DG) and some other discount retailers will report earnings. For the past several years, Dollar General and other deep-discount retailers have been growing strongly as consumers have embraced thriftiness. Most interesting is that a lot of the growth coming to places like Dollar General is from households earning over $70,000 a year. Since Dollar General has more locations than Wal-Mart, consumers find Dollar General (and other discount chains) more convenient and quicker for picking up necessities at prices that often beat Wal-Mart prices.

In the past, such results from Wal-Mart would send shares of all retailers lower. At mid-morning on Tuesday, Wal-Mart was down almost 4%. Dollar General is up about 0.5%, and analysts are expecting the company to report that EPS grew by more than 20% quarter over quarter. 

For once, the U.S. stock market in 2012 may be more focused on domestic issues than on what is happening over in Greece. Indeed, Greece is a big deal, and Wal-Mart is a big deal, but the U.S. economy is showing strength in other areas that in aggregate are more important to the overall health and well-being of the economy. Let valuation be your guide, and you will insulate yourself from any market shocks. 

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