May 17: Retail Strength – Economic Highlights

With the earnings season winding down and the economic calendar on the thin side, stocks have been getting concerned lately with the macro picture. Questions about economic growth in the U.S., debt issues in Europe, and inflationary pressures in China have been drowning out a number of positives in the last few days.

We do have a fair number of earnings reports this morning from a host of household names. We had results from Wal-Mart (WMT), Hewlett-Packard (HPQ) and Home Depot (HD). Wal-Mart came out ahead, while the other two painted a mixed picture. On the economic calendar, we had April Housing Starts, which came in weaker than expected.

Hewlett-Packard was forced to release results this morning, following the leaking of an internal memo in which the CEO was warning his senior managers about tough times ahead. The computer giant came ahead of expectations in its quarterly results, but guided lower, citing weakness in consumer PC sales and issues in the services business. They also mentioned the Japan disaster as one of the issues for the soft guidance. The problems in the consumer PC market are well known, but the issues in the services business may play into the macro question of softening demand in corporate IT spending.

Of the “big box” retailers, we got better-than-expected results from Wal-Mart, while Home Depot beat on EPS, but came short of top-line expectations. As had been the case with Lowe’s (LOW) the other day, Home Depot cited bad weather as a contributor to the revenue miss.

In the Wal-Mart report, the important takeaway is not their top- and bottom-line beat, but the better-than-expected same-store sales numbers for the retailing giant’s domestic operations. Same-store sales in the U.S. dropped again, as has been the trend over the last many quarters, but the drop was less than expected.

Today’s strong report from Wal-Mart should help reassure the market about the health of the retail scene, lessening some of the macro anxieties referred to above. But it will likely take some time before those concerns get definitively addressed to the market’s satisfaction.

As such, we should brace ourselves for erratic trading behavior in the seasonally weak summer weeks. But I would caution against acting on the ‘Sell in May and go away’ advice. You have to stay invested if you want solid gains over time; timing the market is a fool’s errand.