Walmart (NYSE:WMT) is the largest company in the world by
revenue. When it speaks, it's worth listening to, since no other company has its
finger more firmly on the pulse of the American consumer. Walmart receives
nearly 10% of every dollar in non-automotive retail spending in the U.S., and
it's also the country's (and the world's) largest employer, making it highly
influential on the American economy as well as a useful barometer for the
economy and for investors of all stripes.
In its second-quarter earnings report, out Tuesday morning,
Walmart had mostly good news to share investors. Comparable sales jumped 9.3%,
driven by strong performance in food and general merchandise like home
improvement, sporting goods, outdoor, and electronics. Revenue rose 5.6% to
$137.7 billion, topping estimates at $135.5 billion, while adjusted earnings
per share jumped from $1.27 to $1.56, well ahead of the Wall Street consensus
at $1.25.
Investors cheered the results, sending the stock up 6% in
pre-market trading, but shares finished the session down 0.7% as one item
soured investors on the report. Several times in its presentations, management
noted the impact of government stimulus, saying it got a significant tailwind
from federal handouts, many of which ended in July. Walmart's comparable sales
slowed to around 4% in July as stimulus payments started to taper off,
management said.
CEO Doug McMillon seemed to believe that government stimulus
was the biggest growth driver in the quarter, saying, "My sense is that
the order of things, the order of tailwinds that impacted the business were
one, stimulus, two, eating at home, three, being at home, and all the things
that you wanted to do to have the indoors and outdoors be more
pleasurable."
Considering Walmart's size and influence on the economy,
that statement could indicate that an economic slowdown, at least in
consumer-facing sectors, is on its way without another stimulus bill from
Congress. Other data points seem to confirm those fears.
A V-shape or a W?
The long-promised V-shaped recovery has arrived, at least in
some metrics. The S&P 500 reclaimed its all-time high on the same day as
Walmart reported its earnings, six months after it peaked in February before
the coronavirus pandemic hit. Similarly, after plunging in March and April,
retail sales in the U.S. surged through May and June, and by July, overall
retail sales, including food services, had fully recovered to $536 billion, a
record for a single month.
But that V-shaped recovery isn't reflective of the
underlying state of the economy. The unemployment rate is still in double digits,
and about 1 million Americans are filing for unemployment insurance every week,
a higher rate than at any point before the pandemic. The Federal Pandemic
Unemployment Compensation benefit expired last month and with it the $600
weekly checks that were going out to 20 million to 30 million out-of-work
Americans.
As a result, American consumers have significantly less
money to spend this month. According to data from the Treasury Department,
through the first 17 days of the month, federal unemployment benefits fell from
$60.8 billion in July to $29.5 billion in August. Extrapolating that data through the end of
the month means that Americans will lose out on close to $60 billion, or more
than 10% of monthly retail spending, assuming Congress doesn't act. Meanwhile,
other funding, like the Paycheck Protection Program, is also running out,
leading to layoffs and business closures.
In addition to essentials, much of that stimulus money had
been spent on discretionary items like home improvement goods, smartphones, and
restaurant takeout. Consumer spending drives 70% of U.S. gross domestic
product, and when a retailer like Walmart says there's a clear headwind in the
end of government stimulus, it's almost certainly affecting the majority of
consumer-facing businesses.
Other data points show a slowdown as well. According to a
report from Indeed, the world's largest job posting website, job postings in
the U.S. have essentially plateaued in August after recovering in recent
strongly in recent months, and last week marked the first time that the gap
between job postings in 2019 and 2020 had widened since April, as job postings
in the week ended Aug. 14 were 20.3% below the same week in 2019, compared to
18.1% the prior week.
What's clear
Predicting what will happen with the stock market in the
next few months is a fool's errand, as the volatility of the last few months
have shown, but investors should take Walmart's comments on government stimulus
to heart. Without another round of emergency funding from Congress, retail
outlets, restaurants, and other businesses that rely on consumer spending are
likely to see a significant drop in spending, and that means what appeared to
be a full V-shaped recovery in both the retail sector and the stock market
could be a mirage.
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