foxex: Mind the Gap

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Stocks tread water as retailers report mixed bag, and U.S. Budget gap widens

Markets Close

Dow
25,806.63 -0.05%

S&P
2,789.65 -0.11%

Nasdaq
7,576.36 -0.02%

VIX
14.74 +0.75%

INV Anxiety Index
99.2 Neutral

US 10-Yr Yield
2.722 0.00%

Budget Gap Widens

Markets went a whole lot of nowhere on Tuesday absent news on the trade talks, interest rates and economic reports. There was a lot of news for individual stocks which we will get to in a little bit.

We did get news on the U.S. budget deficit, which widened to $310 billion in the first four months of the fiscal year. That's a 77% increase from the same period a year ago, according to the Treasury Dept., but it shouldn't come as a surprise to anyone. The U.S. government spends more than it earns, and the tax cuts from 2018 along with increased government spending added to the deficit.

Why it Matters

There is a growing debate about the size of the deficit with Budget Hawks, on one side, who want to eliminate deficits because they reflect an unhealthy economy, and Budget Doves, who are OK with deficits as long as they are sustainable. Hawks argue that increasing budget deficits can hurt the credit worthiness of the U.S. economy and discourage investors from buying U.S. Treasury bonds, which the government relies on to finance just about everything. It can also lead to a credit downgrade, which happened to the U.S. in 2011, most recently. Standard & Poor's, one of the main credit rating agencies downgraded the U.S. to AA+ from AAA, its highest rating, which caused a massive sell-off in both the bond and stock markets. A credit downgrade can also lead to higher interest rates if the demand for Treasury bonds weakens and investors need to be tempted with better yields in order to make them more attractive.

Fitch Ratings, a competitor to Standard & Poor's, threatened to downgrade the U.S credit rating in January in the midst of the government shutdown, but there have been no threats since.

GE Falters

That 75% rise in shares of GE over the past two months hit a significant speed-bump today, as CEO Larry Culp told a group of investors that GE's 'industrial free cash flow' will be negative in 2019. Free cash flow is another word for 'profits', after operating expenses and capital expenditures. It measures a company's efficiency, and last year GE generated $4.5 billion in industrial free cash flow. Culp is in the process of selling off non-performing assets for GE and investors have rewarded his efforts over the past two months. But today's revelation revealed that the core GE is betting its future on is not performing as well as investors had hoped.

Shares of GE fell 4.7% on the news, after declining 10% last week. It could get worse.

Read More: Why GE is Losing Steam

Target Nails it!

Target seems to be hitting all the right spots for investors lately. The retailer reported better than expected earnings and sales for the fourth quarter of 2018. Sales came in at $22.9 billion, which was higher than forecast, and online sales grew more than 25%. The company did reign in profit guidance for 2019, as it plans to renovate hundreds of stores, but it has been quietly succeeding both in store and online for the past couple of years. The stock has bounced back from the heavy declines of late 2018, and is up nearly 10% in the past year.

Kohl Scores

It wasn't just Target hitting all the right notes on Tuesday. Shares of Kohl's popped more than 7 percent as it reported fourth quarter results that also exceeded analyst expectations. As opposed to Target, Kohl's actually raised guidance for 2019 as it sees both revenue and profits increasing in the coming year.

Why it Matters

Retailers like Target, Walmart, Home Depot and Kohl's provide a great snapshot on the health of the U.S. consumer, which, as we know, makes us 70% of GDP in the U.S. Healthy consumers spend money on their homes, their cars, and their family's needs. These retailers feel the pinch when consumers are feeling tight, which makes them reduce inventories, close stores and lay off workers.

Today I learned that the U.S. consumer also has an outsized impact on the GDP of other countries. This chart from Deutsche Bank, which was shared this morning on the WSJ's 'The Daily Shot', newsletter, shows the impact of the U.S. Consumer on other developed nation's GDP in 2018. It's no surprise that China is the biggest beneficiary, but what surprised me was how much more the U.S. consumer impacts GDP than U.S. government spending.

That's your chart of the day today.