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Miracle on 34th Street: Macy’s Blowout Q1 Lifts Markets

By John Persinos on May 16, 2018

A litany of worsening geopolitical woes failed to deter investors Wednesday, as the retail sector came to the rescue. After opening flat and wavering for most of the day, the main stock indices closed in the green on renewed optimism over consumer spending.

Consumer discretionary and staples stocks led the way. The upward momentum was sparked by Macy’s (NYSE: M), which reported stunning first-quarter earnings before the opening bell. Coming off a strong holiday season, the department store chain is benefiting from its beefed-up online presence and increasingly confident shoppers.

In a retail landscape dominated by e-commerce giant Amazon (NSDQ: AMZN), Macy’s pulled off a miraculous feat.

Macy’s adjusted earnings per share (EPS) came in at 48 cents, versus the consensus expectation of 37 cents. Revenue reached $5.5 billion vs. $5.4 billion expected. The important metric of same-store sales racked up an increase of 4.2% compared to the expected increase of 1.4%.

Macy’s now expects full-year 2018 EPS to fall within a range of $3.75 to $3.95, 20 cents higher than previously forecast. It seems that even Macy’s management was surprised by the stellar quarterly performance. The retailer’s shares shot up today by 10.79%, cheering investors just when they needed it.

However, the stock market’s modest gains today were kept in check by worries about North Korea, Europe and China. Lingering concerns about inflation and rising interest rates also weigh on equities.

Sexiest man alive?

Don’t underestimate Kim Jong-un’s ability to spook financial markets. Sure, he sports a cartoonish haircut that seems inspired by Moe of The Three Stooges. And yes, The Onion named him Sexiest Man Alive for 2012, a satirical fake story that Chinese media mistakenly reported as real news.

But the nuclear-armed dictator really is no laughing matter. Before rebounding in late trading Wednesday, stocks wobbled as investors tried to digest Kim’s latest antics.

Kim Jong-un today cast further doubt on next month’s planned summit between himself and President Donald Trump, throwing weeks of hopeful diplomacy into a cocked hat. Among key sticking points, North Korea’s totalitarian regime is unhappy about recent joint military exercises between the U.S. and South Korea.

Kim Jong-un reiterated his rejection of Washington’s demand that North Korea unilaterally renounce nuclear weapons. Kim’s renewed intransigence is a signal that he’s not done making provocations that move markets.

President Trump once boasted in a tweet that his nuclear button is “much bigger” and “more powerful” than Kim Jong-un’s. More recently, Trump has publicly committed himself to a peace process with Kim. The president’s gambit seems to have backfired, though, as Kim suddenly withdraws the olive branch.

Likely cancellation of the June 12 summit in Singapore unnerves Wall Street, which already is contending with worsening trade tensions between the U.S. and China. As the spat between Donald Trump and Kim Jong-un intensifies, no one wants to find out whose button is bigger.

Even America’s western allies are giving investors the fits.

Reports surfaced Wednesday that the two parties negotiating to form Italy’s next coalition government would seek debt forgiveness from European creditors. Italian stocks slid today and the euro fell to a five-month low. Add Britain’s rocky negotiations over “Brexit” to the mix and suddenly Europe has become a concern.

Italy is the third-largest national economy in the euro zone and the eighth-largest in the world. Italy is the second-largest manufacturer in Europe behind Germany, the world’s largest wine producer, and famous for the style and high quality of its automobiles, aircraft, appliances, and fashion.

The largest market for luxury goods in Europe, Italy taught the world how to eat and make movies and live La Dolce Vita (“the sweet life”).

Italy also happens to be an economic basket case. The country’s banks are saddled with €360 billion of bad loans, of which €200 billion are categorized as insolvent. Angst over Italy underscores the ticking debt bomb not just in Europe but around the world.

Meanwhile, trade talks this week between China and the U.S. have reportedly stalled, with the two parties still far apart on a range of issues.

But for today, at least, investors found solace in Macy’s latest operating results. The retailer’s earnings report is seen as a harbinger of robust consumer spending and continued economic growth. In a day dominated by bad news, Macy’s provided a good-news parade.

Wednesday Market Wrap

  • DJIA: +0.25% or +62.52 points to close at 24,768.93
  • S&P 500: +0.41% or +11.01 points to close at 2,722.46
  • Nasdaq: +0.63% or +46.67 points to close at 7,398.30

Wednesday’s Big Gainers

Internet media firm’s earnings impress.

Retailer of western footwear beats on earnings.

Demand booms for golf entertainment chain.

Wednesday’s Big Decliners

Sports online retailer misses on earnings.

Biotech’s new drug prospect could hit FDA snag.

Analysts turn bearish on genetic data provider.

Letters to the Editor

Readers have asked me for clarity on a commonly used metric: the projected five-year compounded annual growth rate (CAGR) for corporate earnings. Why does this figure often seem so vague and unreliable? Let me shed light on the matter.

Five-year CAGR is an aggregate growth estimate per year for the next five years. To be sure, there are limitations to using a projected growth rate for any given year. There can be great fluctuations in growth from year to year. This volatility is smoothed out to get a rough estimate for the future.

Of course, a company can see an abnormally high earnings growth figure in one year and an abnormally low growth figure the next. CAGR takes into account the power of compounding growth, but again, the approach is limited because it’s subject to the possibility of abnormal earnings (high or low) in either the beginning or ending year.

Also keep in mind that the CAGR estimate is not a true return rate. It describes a hypothetical steady rate, which almost never happens in reality. It’s an approximate representational figure to make earnings growth more easily understood.

Confused about any financial metrics? I’m here to help: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.

 


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