October 24, 2012
With U.S. stocks near five-year highs, the unmistakable reality of a sputtering global economy has hit home, stifling U.S. corporate sales and spooking investors.
They started heading for the stock market exits last week, and they picked up the pace Tuesday after executives from one U.S. stalwart after another talked about a slump in global sales and expectations that pressures could weigh on profits for the rest of this year and into 2013.
The Dow Jones industrial average closed down 243 points Tuesday at 13,102.
And in a chilling move for Americans hoping for better job prospects, chemical-maker DuPont Co. announced Tuesday that it is coping with global profit pressures by eliminating 1,500 jobs. While that announcement doesn't make a trend, the U.S. clearly cannot afford a new round of job cuts as companies try to make up for sluggish sales in Europe and other parts of the world.
Recently, U.S. consumers have grown more confident about the future as unemployment eased to 7.8 percent, a mortgage refinancing boom put money in pockets, home prices stopped declining and stocks climbed 14 percent for the year. A brighter outlook provided some assurance that consumers would do more to lift the U.S. economy than they've been able to do with oppressive mortgages, stagnant incomes and joblessness weighing on them since 2008.
Now analysts are talking about a two-tier economy, with consumers fairly confident and presumably willing to spend, but businesses skeptical about the future as they find it more difficult to profit from sales to Europe, China and other countries.
Since last year, some analysts have warned that recession in Europe and a slowing China would take a toll on large U.S. companies that depend on selling products in those markets. But when companies reported solid quarterly earnings early this year, cautious analysts looked like they were crying wolf.
Investors became emboldened, especially after the Federal Reserve announced a new round of stimulus in early September, and European Central Bank President Mario Draghi promised to do whatever it would take to help Europe escape its debt crisis.
Today, however, much of Europe is in recession, European leaders still haven't fulfilled Draghi's promises, and U.S. companies are starting to show the pain. Only about 39 percent have beat sales anticipated by analysts, according to strategist Ed Yardeni. "It's the worst reading since the fourth quarter of 2008," he said.
Companies are having trouble selling products to Europe and Asia, where economies have slowed along with China. In addition, the relatively strong U.S. dollar has been a drag when sales abroad are converted back to dollars.
"Concerns about the economic environment have left business confidence in a very fragile position," said Nathan Sheets, Citigroup global economist.
Noted Moody's Analytics economist John Lonski: "No one has been able to convincingly argue what might soon rejuvenate business sales."
Earnings disappointments have been broad-based, including for consumer companies such as McDonald's, but also Google, IBM, General Electric, 3M, UPS and Microsoft.
Both globally and in the U.S., the issue has been "weak consumer demand" and "a lack of more robust business investment," said Ken Goldstein, economist for the Conference Board.
Caterpillar, when it reported earnings, noted that global demand hadn't been growing at the pace it anticipated. So it lowered its expectations for sales this year to $66 billion, from about $68 billion. For 2013, the company said sales could be between 5 percent below this year's and 5 percent above, but the company is not expecting a recession.
Illinois Tool Works also noted that international demand continued to slow and that revenue was hampered by currency translation.
McDonald's, which does business globally, noted after disappointing earnings for the second and third quarters that demand is challenging in every major region. Chief Executive Don Thompson said that after the economic crisis began in 2008, few people thought the environment would still be as "uncertain and fragile" as it is today.
With the pressures for restaurants, Citigroup analyst Gregory Badishkanian said McDonald's is going back to its "value focus" with a $1 menu. While the company can gain customers that way, Badishkanian says it will put pressure on margins.
McDonald's isn't the only restaurant chain under pressure. Chipotle also surprised investors by reporting that consumers are pinching pennies.
Technology has been among the harder-hit sectors. Besides global economic issues, some companies face changes in demand based on new preferences such as iPads and smartphones rather than personal computers.
Still, while the earnings reports have startled investors, analysts say that many U.S. companies are equipped to weather tougher times.
"Unlike the two most recent market peaks in 2000 and 2007, U.S. stock fundamentals remain in excellent shape," said BMO Capital Markets strategist Brian Belski.
That might mitigate a sharp fall in the stock market, but stocks are bound to decline when corporate profits are deficient. Even the mighty Fed can't make up for that.
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