Why the Dow Jones Plunged Nearly 200 Points Today

Wal-Mart (NYSE: WMT  ) is leading the Dow Jones Industrial Average (DJINDICES: ^DJI  )  down today after the company reported its lowest sales growth in years and forecast weak sales going forward. The weak guidance from America's largest retailer combined with multiple negative reports on the housing market and economy to push down the stock market today. As of 1:30 p.m. EDT the Dow was down 190 points to 16,421. The S&P 500 (SNPINDEX: ^GSPC  ) was down 23 points to 1,865.

Wal-Mart is down 2.5% after the company reported earnings per share of $1.10, down 3.5% from the prior-year quarter and below analyst expectations of $1.15. Wal-Mart attributes $0.03 of that drop to the harsh winter, with CEO Doug McMillon saying, "Like other retailers in the United States, the unseasonably cold and disruptive weather negatively affected U.S. sales and drove operating expenses higher than expected."

Revenue was $114 billion, 0.8% above last year but well below analyst expectations of $116 billion. If you exclude currency fluctuations, revenue would have increased 2.1% to $115.7 billion. There were pockets of strength, however. McMillon noted, "We remain focused on growth across the enterprise, especially in small formats like Neighborhood Market in the U.S." Comparable sales at Walmart Market stores increased 5% in the quarter, with net sales up 100% over the past two years.

Many had already expected a weak quarter due to the weather, but the stock is down today because the company forecast weak sales and earnings for next quarter. Wal-Mart believes second-quarter earnings will be between $1.15 and $1.25 per share, lower than last year's $1.24 and well below analyst expectations of $1.28. CFO Charles Holley said, "Our guidance assumes incremental investments in e-commerce, headwinds from higher health care costs in the U.S. and increased investments in Sam's Club membership programs."

Wal-Mart's results are particularly attuned to the fortunes of low-income consumers. Low-income consumers in the U.S. have been hit by a cut in Supplemental Nutrition Assistance Programs and health care payments owing to Obamacare, which started this year, and Wal-Mart is feeling the effects of that one-two punch.

Wal-Mart's weak results combined with some weak U.S. economic releases today to push the stock markets down today.

Report

Period

Result

Previous

New unemployment claims

May 3 to May 10

297,000

321,000

Consumer Price Index

April

0.3%

0.2%

Core CPI

April

0.2%

0.2%

Industrial production

April

(0.6%)

0.9%

Capacity utilization

April

78.6%

79.3%

NAHB Housing Market Index

May

45

46

While the economy was weak in the first quarter and may have even declined, the Federal Reserve and Chairwoman Janet Yellen are confident the economy will rebound in the second quarter. The two economic releases to pay attention to are the industrial-production and homebuilders index figures, neither of which suggests a rebound. Industrial production was revised upward in March from 0.7% growth to 0.9% growth. Analysts were expecting a 0.2% fall this month, but the index fell a steeper 0.6% from the raised level. Including the revision of March's growth, industrial production still fell short of analyst expectations for April.

Meanwhile the National Association of Home Builders Housing Market Index for April was revised downward by one to 46. In May, the index continued to decline to 45, missing analyst expectations of a rise to 48.

NAHB/Wells Fargo US Housing Market Index Chart

NAHB/Wells Fargo US Housing Market Index data by YCharts. Numbers current as of February 2014.

NAHB chairman Kevin Kelly said, "After four months in which the HMI has shown little signs of fluctuation, it is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery." While the market currently expects 10% earnings growth this year, days like today suggest that's too optimistic. It's for this reason and others that I continue believe the stock market is overvalued, but opinions do differ. In any case, stick to your plan, keep learning, and look for good companies at great prices.

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