Fri, 28 Jun 2013
Five stats from the market and the stories behind them. This week: consumers drag down GDP, home sales hit a six-year high, and target-date funds reach $500 billion in assets.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five: five stats from the market and the stories behind them.
Joining me, as always, for The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: What do you have for the Friday Five this week?
Glaser: We're going to look at the numbers 1.8%, 6, 16.5%, $500 billion, and 1%.
Stipp: 1.8% was the third read on first-quarter GDP. It was a lot lower than just about everybody expected, maybe even including the Fed?
Glaser: I think so. Most times between that second revision and that third revision of GDP--this was the third revision--you don't really see a big change, and we saw [a big change] this time.
We went [down] to 1.8%; economists were expecting 2.4%. And the biggest driver of this, as Bob Johnson, our economist, has discussed, was consumer weakness. The amount that [consumers] were spending was just less than everyone had initially expected.
They're just under pressure. A lot of these issues that we've be talking about for a long time--the payroll tax cut, stagnant wage growth, employment getting better but still not great--really is weighing on people, and they're just not out there spending as much, particularly in categories like travel or restaurants, and things like that.
But what's striking about this is just how far away it is from the Fed's projections of where they see the economy this year, and particularly next year. With all the worry about the Fed taper, it's missed that their economic projections were actually fairly robust and pretty bullish. If the economy doesn't really meet those projections, the timeframe that they laid out for when they were going to take their foot off the accelerator might be more aggressive than what's actually going to happen.
So I think if we continue to see some of this relatively soft data from consumers and from elsewhere, particularly if it shows up in the jobs data, we could hear less talk about the Fed taper. I think that's something that would sooth a lot of concerns that we're going to see some tightening relatively soon.
Stipp: It's been six years since we saw pending home sales as high as we got in the data this week. What's behind that--and more importantly, will it be sustainable?
Glaser: It was a big surge. The National Association of Realtors that tracks this data said that from April to May, it was up over 6%, over 12% year-over-year, and what seems to be happening is potential buyers are seeing that interest rates are ticking up a little bit, mortgage rates are going up, and they're trying to lock in relatively low rates [out of] fear that mortgage rates will go up significantly and will make homes less affordable, and they might not be able to get what they wanted.
So the question, is it sustainable, is a really important one, … If mortgage rates do go up much higher from where they are now, is that going to completely short circuit the housing recovery?
I think the answer is that rates are unlikely to go up a huge amount to the point where it will totally short-circuit everything. Housing remains an important vector for the economic recovery. I think if mortgage rates started to go very much out of control, you would see the Fed would be concerned about that and would probably step in and bring them down again.
Housing affordability is still reasonably good. There still is lot of household formation that has to happen and people are going to need those houses; they're having kids no matter where mortgage rates are. But it will be interesting to see where we go from here. The housing market in general will be important to keep watching.
Stipp: 16.5% represents the peak margins for Bed Bath & Beyond, which is pretty high above what we saw from them recently. So we've got to lower the bar for our operating margin expectations?
Glaser: We might have to. 16.5% is what they had in 2012. They had about 12.4% in this most recent quarter.
[Morningstar director of consumer equity research] R.J. Hottovy, who wrote the note on Bed Bath & Beyond for this quarter, really sees that as a function of Bed Bath & Beyond having made some acquisitions--Linens 'n Thing and World Market. They are being a little bit more promotional. They have a lot more competition, and that's going to make it very difficult for them to really get back to that old profitability level.
That doesn't mean that it's still not an interesting story. It's a very well-run business. They potentially could benefit very much from the housing recovery that we just talked about in terms of people move, they need a lot of the stuff that's being sold at Bed Bath & Beyond. But in a broader sense, it really points to [the fact that] a lot of companies, I think, are going to have trouble getting back to where they had peak margins before.
We saw that big runup in profitability as companies were able to cut costs, cut loose divisions that maybe weren't as profitable, and really optimize their businesses throughout the recession and through the recovery, and some of those gains are going to start to be given back. When you have more competition, when you have to potentially bring up more people in order to get those sales going, and do more promotions, that's going to hurt profitability.
How far back [margins] go down, I think, is bit of an open question, and I think that's why we're going to be watching earnings very carefully this quarter, next quarter, and beyond, to see what's happening with margins to get a sense of where earnings are coming in and what that could potentially mean for stock valuations.
Stipp: $500 billion represents the amount of assets under management in target-date funds, and that's a good thing for investors.
Glaser: It definitely is. Morningstar released this week our annual report on the target-date industry, and we found a lot of positive things this year. Like you mentioned, assets under management hit that $500 billion mark. But importantly, costs have come down significantly as investors move into passive funds that are less expensive, move into cheaper share classes. That helps bring down that cost structure, which is important for long-term gains. And performance has been pretty good. Part of that has been helped by very well-performing market generally, but these funds are basically working as advertised. For investors who are putting money into their 401(k)s, putting a little bit of money away every month, or lot of money away every month, and are sticking to the plan, are having enough money to retire, should have enough money until they are 85. Past that [age], there is some divergence based on how aggressive the different funds are.
But generally speaking, that's a good thing. It makes something that can be very complicated for a lot of people, … or can be unpleasant, you don't want to spend a lot of time with your investments [easier]. [Target-date funds] give a really reasonable option for being an investor in a 401(k) plan and having a solid retirement without having to spend a lot of time sweating the details of your investments.
Stipp: 1% is the sales growth, absent acquisitions, from General Mills, so they are under some pressure recently.
Glaser: They are. The weak consumer that we've talked about a little bit over the last couple of points today is showing up in food, too. In a couple of different categories, General Mills is really having some troubles--in cereal, in yogurt, and elsewhere--and a lot of their growth is coming from acquisitions, instead of organically.
They are trying to turn this around, having some in-store promotions, trying to release a lot of new products to get people excited about their new brands to pay up for them. Erin Lash, who covers General Mills for us, thinks the shares are about fairly valued right now, but if there were to be a pullback, it could be a pretty good business that could look interesting for a lot of investors.
Stipp: You certainly have five stars again this week on The Friday Five, Jeremy. Thanks for joining me.
Glaser: You're welcome, Jason.