In my last post we discussed the slowdown in the industrial sector and how it is affecting companies like 3M. However, on a global scale, other sectors appear to be contracting. More specifically, we’re seeing a mild recession in Germany and growth in China slowing dramatically. The U.S. appears to be the bright spot. Yes, industrial companies appear to be slowing but the consumer remains strong. Consumer confidence remains high at 135.7 and American citizens are spending money. This was reflected in Target’s recent earnings release with the stock rising 20%. The company earned $1.82/share beating analyst estimates. Same store sales increased 3.4% and quarterly profits surged 17.4% to $938 million.
Thankfully, 68% of the U.S. economic activity has to do with consumer spending. The fact is, people are spending almost every dime they make! When consumers stop spending money, then and only then, will we enter a recession. Strong consumer activity was also evident in earnings releases from Walmart and Amazon. Yes, some retailers are struggling and companies like Sears are even shutting down. However, the retailers that innovate and focus on ecommerce are doing just fine! Target, for one, reported 34% growth in ecommerce for the most recent quarter. The company even increased its guidance despite trade tensions.
Last week the trade conflict appeared to get even worse. China responded with tariffs on American goods and Trump countered accordingly. Trump also “ordered” U.S. companies to leave China and begin manufacturing in the United States. The fear is China tariffs will plunge the U.S. economy into recession. However, this trade conflict has been persisting for two years, and most companies are still growing their earnings. As the China situation gets worse, companies will indeed need to begin rearranging their supply chains. They could retreat to other areas of the Asia Pacific region or, yes, come back to the U.S. More importantly Trump sees the China trade conflict as a win-win.
If Trump makes a deal with China, then trade conflicts cease. The U.S. then has access to one of the largest markets in the world and everyone wins. On the other hand, China can continue to decline. Meanwhile the U.S. economy will also slow. In response, the Fed cuts rates further and U.S. companies rearrange their supply chains. With low rates and a new supply chain, companies can claw back their losses. So overall, this trade war creates tremendous volatility and risk. However, these concerns should smooth out over time and the market will likely move higher. And most importantly, the U.S. consumer is strong, and jobs are a plenty. For these reasons I’m still a buyer and plan on acquiring some new shares in the near future.
DISCLAIMER: I am long and own TGT & AMZN. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.