U.S. equities inched higher on Tuesday amid another quiet, uneventful trading session.
The big news was word that labor productivity dropped for the third consecutive quarter amid an increase in unit labor costs. Not only will this be a further drag on corporate earnings — with the recession in profitability now expected to stretch to six consecutive quarters — but this could weigh on the overall economy as well.
In the end, the Dow Jones Industrial Average gained a fraction, the S&P 500 Index gained a fraction, the Nasdaq Composite gained 0.2%, and the Russell 2000 gained 0.1%. Elsewhere, Treasury bonds were stronger, the dollar was weaker, gold gained 0.4% and oil lost 0.6%.
Healthcare, consumer staples and telecoms were the day’s leaders. Energy and discretionary stocks were the laggards. Gap Inc (NYSE:GPS) dropped 6.3% after reporting a July comp-store sales decline of 4% vs. the 1% drop expected citing a slowdown in traffic, particularly to its upscale Banana Republic line. Target Corporation (NYSE:TGT) dropped 3.2% after cautious comments from analysts at Cleveland Research noting evidence of soft sales in July and downside risk to Q2 results as traffic and market share come under pressure.
Watch for consumer/retail stocks to be in focus later this week ahead of earnings from department stores.
Back to the drop in productivity, which is being driven by the obsession during this business cycle in using cash flow and debt financing for M&A and share buybacks instead of the real investments in capital needed to make workers more efficient as shown in the chart above.
The drop marked the first year-over-year decline since the second quarter of 2013. In addition to a lack of capital expenditures, other factors cited by analysts for the decline include baby boomer retirements and uncertainty in the business outlook. Should current trends continue, hiring could be pulled back in an effort to protect profit margins.
For now, the situation remains quiet ahead of Federal Reserve Board Chair Janet Yellen’s speech later this month. Any near-term volatility will be provided by crude oil which dropped back below its 20-day moving average on inventory concerns.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.
