If a recession is on the horizon for the summer, it's best to start digging into the heart of companies to see what's really happening today, rather than relying on government data.
Let's face it, strategists and pundits continue to rely on macro data to support their still optimistic views on stocks. There is the argument that despite U.S. industrial production falling in 10 of the past 12 months, in large part due to the strong dollar and fallout in oil markets, a sector such as housing continues to be just fine. In other words, the economy is demonstrating remarkable resilience.
Another justification for maintaining an upbeat tone on stocks is that in the past five years, every recession has seen the number of jobs in the economy decline by at least 1%. Well thus far, the U.S. jobs market has remained fairly solid in the past 12 months and actually gained momentum into 2016.
But -- as horrible earnings reports from companies such as railroads Union Pacific (UNP) and Kansas City Southern (KSU) suggest and post-holiday retail restructurings from Macy's (M) imply -- the stock market may be right in predicting a mild recession sometime this year. The government data appear very misleading based on what is transpiring so far this earnings season.
There is a real sense of renewed stress on companies from a top line perspective and in turn, a refocus by well-paid execs on saving their skins by cutting expenses to protect profits. At the end of the day, how could one explain a possible merger of Johnson Controls (JCI) and Tyco (TYC)? These are execs of major industrials fearful of their weak stock prices, and a more subdued outlook for global growth in coming years could lead to further share price weakness. Ultimately, they lose their gigs if the stocks continue to lag. Why not simply join forces and in the process tell a new story to investors of a global industrial titan with significant cost-saving opportunities that could help counteract top line sluggishness? If they can cross-sell each other's products, so be it.
Meantime, here are several recent events that deserve greater attention than they initially received by the market. I think they collectively hint at the macro slowdown the market has been concerned about and ultimately raise the level of skepticism on any rallies in the markets.
- American Express (AXP) announces new $1 billion cost-savings plan: the payments giant has aggressively taken out costs from its business post the Great Recession. Now, amid a disappointing end to 2015 in part due to the weak global economy, it's slashing $1 billion in expenses by the end of 2017. There go more jobs down the toilet. In listening to American Express' CEO Ken Chenault at a keynote at the National Retail Federation conference last week, I am in no way surprised by the announcement (I actually think it was wrong for the company to put its CEO on stage at that forum to wax poetic about the company's prospects and then drop a nasty bombshell on unknowing investors a day later). Chenault sounded rather downbeat on the global economy and concerned about the structural upheaval in the payments industry, which will require massive investment by American Express to stay competitive. American Express shares should not be bought on the pullback -- the stock no longer deserves its relative premium, in my view.
- PPG (PPG) silently sounds the alarm bell on China: Action Alerts PLUS portfolio name Starbucks (SBUX) founder and CEO Howard Schultz, in typical fashion, downplayed a slowing rate of sales growth in China. But Schultz' bullish comments on China seem a tad silly when hearing those from an industry company such as PPG, which said architectural coatings sales in China declined in the quarter. These types of sales tend to be forward indicators on an economy. Moreover, demand in Europe was not too hot for PPG, something I have heard from others of late and suggests slowdown contagion is spreading from emerging markets such as China and Brazil.
- Briggs & Stratton (BGG) shows weakness: sales of engines were down overseas year over year in the quarter, with "uneven" demand seen in Europe. As it turns out, customers overseas are ordering closer to season, in the hope of demand improving from recent trends. Further, the company pointed out sales of smaller engines in the U.S. -- which have lower average selling prices -- outpaced those of larger engines. Not exactly a great sign as to the confidence of CFOs in the near-term demand outlook (they oversee the budgets).
Overall, I expect more major restructuring announcements within the next six months -- think old-school companies such as Microsoft (MSFT), or an industrial such as Growth Seeker portfolio name General Electric (GE) -- as companies adjust to a stubborn global growth backdrop. In light of the potential for restructuring, one has to wonder: Why pay current valuations?