US equity markets ran out of steam and fuel for the anemic attempt at a rally yesterday, finally succumbing to a wave of earnings results that confirmed for investors that consumers, as measured by consumer spending, are not reading the script. With a running monthly average of employment gains at roughly 200k over the past 6 months, interest rates at historically low levels and with gasoline as cheap as it has been in years, the theory was that consumers would spend aggressively. It appears as though consumer spending has actually begun to tapper off in recent months. Yesterday’s price action in retail names in particular spoke to that.
For example yesterday, retailers Macy’s, Ulta Beauty, Ross Stores and Kohl’s all fell sharply on the day. In the case of Macy’s it traded to the lowest it has been since 2011. Apple is in a class all its own but even in that regard, revenues and sales speak to a slowdown in the rate of consumer spending.
Robust consumer spending is clearly not present.
Friday’s release of Retail Sales data at 8:30 AM EST should put a fine point on it. Friday will also provide producer price data (read inflation) in the PPI-FD, Business Inventories and Consumer sentiment. In other words, Friday’s economic data is very important.
US equities all lost ground yesterday and appear to be positioned to post a repeat performance today. The Nasdaq and S&P 500 lost 1% while the Dow Industrials gave back 1.21%. Importantly, volume accelerated on the day. Nasdaq volume was 7.03% higher than Wednesday’s and the NYSE saw volume rise by 6.82%. In short, yet another distribution day. From a technical perspective, the Nasdaq failed in its attempted assault on its 50 DMA while reaming below its 200 DMA.
There is a great deal of time and data between now and the June FOMC Announcement.
How I see it: The double-edged sword
The weaker than expected economic data we have been treated to in recent weeks, as measured by last Friday’s April Employment Report, clear confirmation of an ongoing trend of diminishing productivity gains and last week’s anemic initial Q1 GDP reading, has given cheer to those hoping for a stall in any monetary tightening by the Fed – as was evidenced by Tuesday’s rather counter-intuitive rally. However, at the same time that economic data has also been buttressed by an earnings season that has provided little in the way of constructive engagement for investors.
Buyers take hold of the reins when data is weak. Sellers regain control of the reins when corporate results disappoint.
As we all know, in the long run, investors and markets need both more robust economic data and better corporate results in terms of revenue growth, earnings and guidance; otherwise, the market will find a level lower that will trigger some enthusiasm based on valuations. Given the current complexion of rallies, based on weak data and a stall in rates, I would continue to suggest we are headed lower despite brief rallies that pull undisciplined traders into the scrum. All of this is not to say that we should expect the Fed to pass on rates in June.