Charlotte County Florida Weekly

International economic slowdowns causing drops in U.S. stock markets

MONEY & INVESTING



 

 

Many people today are understandably confused with the current state of the financial markets. On one hand, the economic data shows that the unemployment rate remains at historical lows, incomes are rising, corporate earnings are great and consumer spending remains strong. But on the other hand, if this is truly the case, why does the stock market drop day after day? Surprisingly, I found the answer to this perplexing question in FedEx’s surprise earnings announcement released last week.

FedEx was founded in 1971 to provide air freight services that would be responsible for a package from pickup to drop-off. Previously, air freight customers would often have to use multiple companies to pick up, fly, and then drop off cargo that needed to be delivered quickly. Since that time, the company has developed multiple innovations in the shipping industry, including introducing barcode scanners on packages which allowed tracking by the customer. Today the company has quarterly revenues in excess of $17 billion, employs over 350,000 people, and now even transports all of the USPS’s Express and Priority mail.

 

 

Heading into the company’s quarterly earnings announcement, FedEx stock was under recent pressure due to rumors that Amazon was expanding its shipping fleet and would potentially no longer need FedEx to deliver its packages. Even more disturbingly, some speculated that Amazon could even launch a competing delivery service to FedEx. However, with the current strength of the U.S. economy, many analysts predicted a fantastic quarter for FedEx and the company delivered. FedEx beat expectations both in terms of revenue and earnings by a healthy margin. Yet the stock fell 10 percent on the news. The reason for this drop had nothing to do with the company’s current earnings but instead was a reaction to the company’s guidance for 2019.

Prior to last week’s announcement, FedEx estimated that it would earn between $17.20 and $17.80 per share. The company now believes that its profit will range between $15.50 and $16.60 per share, a very meaningful drop. This was a big surprise for analysts who believed that FedEx would potentially even raise its guidance as the economy remained resilient. But the CEO blamed the drop in expected earnings on one factor, a slowdown in international trade, especially in Europe and Asia.

The company explained in its post earnings release conference call that the U.S./ Chinese trade war, tariffs and Brexit all would contribute to a dramatic decrease in goods being shipped between countries in 2019. Further, FedEx stated that it did not believe that this business will recover in the foreseeable future and that the company announced plans to limit hiring, reduce capacity at FedEx international, cut discretionary spending, and even start voluntary employee buyouts.

The problems disclosed by FedEx are the reasons that the stock market is falling. While domestically our economy is strong for the time being, the rest of the world is not so lucky. Most of the leading equity markets across Europe and Asia are already in bear markets with their economies heading closer and closer to recessionary levels. And many economists believe that it is just a matter of time until these negative pressures push the U.S. into a recession as well. This is why many U.S. companies that have meaningful sales abroad are cutting financial forecasts and are being hit hard by the markets.

Finally, the CEO of FedEx, Frederick Smith, made an acute observation at the end of the company’s earnings call regarding the cause of the recent global slowdown. He placed the blame squarely on the world’s politicians. He stated, “I’ll just conclude by saying most of the issues that we’re dealing with today are induced by bad political choices. I mean, making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So, you just go down the list, and they’re all things that have created macroeconomic slowdowns.” Something to think about as we enter the next election cycle. ¦

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