Economic doubts have investors in high anxiety
Even a better-than-expected April retail sales report couldn't lift sentiment on Wall Street as last week ended. The problem is the ongoing flow of disturbing earnings results from retailers such as JC Penney (JCP), which dropped 2.8 percent on Friday in volatile trading after it reported a top-line miss and a downturn in sales at stores open a year or more.
Worries are coming in from overseas as well. According to High Frequency Economics, world trade volume is collapsing at a rate not seen since the recession. Chinese equities lost 3 percent last week for the fourth consecutive weekly decline amid a crackdown in commodity speculation as well as chatter that Beijing is dialing back its credit-focused policy support. Adding fuel to the fire has been some rather hawkish commentary from Federal Reserve officials.
As a result, the Dow Jones industrials index has taken out major technical support: The 50-day moving average has been lost in a major way for the first time since late February (yellow arrow in chart below). This sets up a possible retest of the 200-day moving average last touched in March.
The normally dovish Boston Federal Reserve President Eric Rosengren attracted the most attention last Thursday after saying he believes the market is too pessimistic on the strength of the U.S. economy and that chances are better of a more aggressive pace of rate hikes this year. Kansas City Fed President Esther George -- a dissenter at the last two Fed meetings -- said interest rates are too low given current economic conditions.
Cleveland Fed President Loretta Mester said recent inflation data is encouraging. On Friday, we learned producer prices rose on a year-over-year basis for the first time since early 2015 as the drag from lower energy prices fades (chart above).
Late on Thursday, Fed Chair Janet Yellen sang her dovish tune that the Fed wouldn't rule out using negative interest rates if the economy needs them. She did, however, warn that policymakers would need to consider the unintended consequences (such as cash hording).
The takeaway is that the Fed could very well pull the trigger on another interest rate hike at its June policy meeting -- something the market simply isn't ready for.
Over the near term, however, the focus will remain on the anecdotal evidence of a slowdown in consumer spending. This comes despite a surge of job openings, steady payroll gains and rising wages. Apprehension is likely being fueled by the 50 percent rise in wholesale gasoline prices since February.
The bad news started two weeks ago when fitness wearables maker Fitbit (FIT) dropped nearly 19 percent on on a deceleration in unit sales growth and weak second-quarter forward guidance. Action camera maker GoPro (GPRO) was also hit hard on inventory write-downs. These are supposed to be two of the hottest consumer areas right now. And yet the magic seems to be fading.
More negative headlines followed. On May 8 came reports that JC Penney was taking emergency measures, including slashing payroll in light of light April sales. All of this was in the context of weak U.S. economic data, including doubts about consumer spending (as the savings rate rises), an underwhelming first-quarter GDP growth report, a tepid April jobs report and an ongoing stall in the manufacturing sector.
On May 9, Gap (GPS) was hit by a surprise same-store sales decline for April of 7 percent vs. the 0.5 percent gain expected. Shares have since dropped nearly 24 percent. On May 10, watchmaker Fossil (FOSL) plunged 25 percent in extended trading after reporting a top- and bottom-line miss.
On May 11, Macy's (M) fell 15.2 percent after reporting a 7 percent-plus drop in sales in what was its fifth consecutive quarterly sales decline. It cut forward guidance as well. Shares dropped all the way back to 2012 levels. And on May 12, Kohl's (KSS) lost 9.2 percent after reporting a first-quarter earnings miss on weaker revenues and a 3.9 percent drop in sales at stores open a year or more.
The result has been a nearly 12 percent decline in the S&P Retail SPDR (XRT) since late March (chart above).
The trend seems clear that Americans just aren't shopping. But adding some confusion was April's strong retail sales report, driven by nice increases in spending on clothing, autos and furniture. The result was the largest monthly gain in spending in more than a year. That will likely boost second-quarter GDP growth close to a 3 percent annualized rate according to Capital Economics.
For now, investors seem to be believing the dour story coming from retailers' earnings reports rather than the one from government statisticians. And that's not good for stocks amid global turbulence and the overhang of a potential Fed interest rate hike in the coming weeks.