Over the last two weeks, much as been said over the state of the global economy. If you’ve been listening, you would think the U.S. is doing just fine despite a somewhat better-than-stagnant eurozone, and what’s shaping up to look like a contracting economy in China.
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One of the key items from last week aside from the expected European Central Bank stimulus package was the acknowledged contrast at the World Economic Forum between the strength of the U.S. economy and the weakness of the eurozone and emerging markets, as well the divergence in monetary policies between the Federal Reserve, European Central Bank and the Bank of Japan.
To me, the difference between the economic prospects was summed up by the World Bank, which recently raised its 2015 growth forecast for the U.S. to 3.2% from 3%, while the eurozone is expected to grow at only 1.1% and Japan at 1.2% this year. That "adjustment" was reinforced by the IMF’s negative revision for global growth prospects this year. According to the IMF, the world economy will now grow by 3.5% in 2015 and 3.7% in 2016, down from its October forecast that put growth at of 3.8% and 4%, respectively.
Also much like the World Bank, the IMF revised its estimate for U.S. economic growth to 3.6% this year, up half a percent. Some quick math shows that the IMF cut its outlook for the three other economic horsemen that are China, the eurozone and Japan.
Let the Data do the Talking
One of my investing mantras that I put to work in The Thematic Growth Portfolio is to not rely on headlines, but to dig into the data to understand what’s really going on in the economy, an industry or a specific company. I also tend to keep my eyes and ears open for data points that call into question what the herd on Wall Street is saying. Too often I’ve found investors get caught up in the hype, they miss what the data is trying to tell them.
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In the case of the “strong” domestic economy, we already know the December employment report was mixed at best with the decline in wages sticking out like a sore thumb. The December retail sales report also disappointed and thus far, many of the S&P 500 companies that have reported their December-ended quarter results have issued negative guidance relative to expectations.
That doesn’t exactly paint a vibrant picture. Neither do the rash of layoffs that have been announced in January.
• Schlumberger (SLB) said it would cut 9,000 jobs, or about 7% of its workforce in response to falling oil prices. Soon thereafter, oilfield services provider Baker Hughes Inc. (BHI) said it expects to lay off about 7,000 employees.
• American Express (AXP) has shared that it plans to cut more than 4,000 jobs over the coming year.
• Online auction site eBay (EBAY) announced it will lay off more than 2,000 workers, about 7% of its global workforce, and may split off its enterprise unit in addition to PayPal.
• United Airlines (UAL) has shared it is assessing whether to outsource jobs at airports around the country in a cost-cutting effort that could affect some 2,000 workers.
• Global beverage company Coca-Cola Co. (KO) is letting go at least 1,600 white-collar jobs globally as part of a cost-cutting move in response to sluggish soda sales.
• Transportation equipment and aircraft company Bombardier, the third largest maker of commercial aircraft, announced 1,00 layoffs in mid-January at its Learjet business.
• Technology company Maximus (MMS) said it will lay off more than 1,500 call center employees
• Alongside an $80 million write down and a pre-tax restructuring charge of $290 million, Dreamworks Animation (DWA) announced it will eliminate about 500 jobs or about 25% of its total workforce.
• The continuing decline in demand for farm equipment will idle more than 900 employees at Deere & Co. (DE). This follows furloughs of 460 employees this past October.
• Smaller layoffs have been announced by Starbucks (SBUX), McDonald’s (MCD), Merk (MRK), and U.S. Steel with rumblings of layoffs at AOL (AOL) as the Internet company gears up for some housekeeping.
Turning to the week ahead, we have 142 of the S&P 500 companies and 11 components of the Dow Jones Industrial Average – that’s 26% of the S&P 500 and 37% of the Dow issuing results this week. Forward guidance, cost cutting and layoffs could be a very big part of the news flow this week. Be sure to put it in context for not only the specific company, but for a stock market that closed last week at 16.7x 2015 consensus expectations of $123.11 per share in earnings (per Factset), well above its 5-year (13.6), 10-year (14.1), and 15-year (16.1) averages. You may want to fasten your seatbelt, the stock market rocket ship could get a little bumpy.
Unlike much of the economic data that is rear-view mirror in nature, layoffs and restructuring charges are a front window view into the challenges and tactical moves a company is making ahead. The more widespread these announcement, the greater concern for the overall economy.
According to the Challenger, Gray & Christmas Job-Cut Announcement Report, 2014 marked the lowest level of layoffs since 1997, but recent activity should serve as a warning that the US economy is far from out of the job creation and economic woods just yet. For a stock market that closed last week at 16.7x 2015 consensus expectations of $123.11 per share in earnings (per Factset) - well above its 5-year (13.6), 10-year (14.1), and 15-year (16.1) averages – the continuation of January layoff announcements would weigh on what looks like an overpriced stock market.