“Dreadful” Retail Sales Report Slams Stock Markets

Stock Markets Down

Retail sales are seen generally as a good measure of economic prosperity at home. When we see a report that is the worst since 2009, that does concern some people.

Stock markets have been cruising along rather nicely over the past few days, buoyed by a more optimistic outlook on the prospects of the trade war between the United States and China ending soon, with nothing much out there to dampen this enthusiasm.

This all changed on Thursday morning with the release of the latest retail sales report. December’s results came in at –1.2%, the worst result since all the way back in September 2009.

We’ve been on a long bull run since then, and the fact that we have never seen a report this bad in almost 10 years, combined with the fact that the last time this happened was during the period we call the Great Recession, isn’t exactly welcome news for stock markets.

There are plenty of people who already were portending a recession on the horizon, and whether or not this ends up coming to pass, this recent data will cause a lot more to jump on this bandwagon. It didn’t take long for the market to cast its vote on this, and it expressed itself by over a 200 point selloff on the Dow during the hour and a half before the bell.

It all came down to how the market would react during regular market hours, whether we’d see this gap get filled at least somewhat or we’d see the New York market pile on to the beating that pre-market trading had put on the market.

The good news is that after the orders of those who were looking to dump stock at the opening, the dust settled 15 minutes into the session after giving up another 80 points. We then started seeing things settle down more, as investors stepped in to buy this dip. This quickly took some of the edge off of the drop and calmed fears that we are headed for a major selloff day.

The Significance of Retail Sales Reports

When retail sales drop, this means that people are spending less, and when they spend less, this means less profits for businesses. While retail sales only apply to companies with exposure to the retail market, this number is seen as being representative of how the domestic economy as a whole is functioning, and poor retail sales is seen as indicating economic contraction overall, and is certainly correlated with it.

Retail sales can drop for a number of reasons, for instance it may be that people are deciding to save more money and spend less, but we usually don’t see this appear out of thin air, and such an increased sense of financial responsibility among the public would not change in a single month so much as to be behind a result like this.

What we infer instead from this number is that people just have less money to spend, and the prod to get them to push themselves to the limit as they normally do is likely still working pretty well. We’re also looking at the month of December, where people push themselves beyond their limits a lot for the sake of the holiday season.

We also got the latest jobless claims and that report was a negative for the markets as well, with jobless claims increasing beyond expectations. More people out of work means less spending, and lower retail sales, and therefore these two reports are congruent. The jobless claim adds synergy to the worry that the retail sales disappointment is causing.

Employment data in fact has been the last bastion of prosperity, and has held up very well lately in spite of other key economic indicators foretelling a slowdown of sorts. Employment data is quite a key indicator in itself to measure the temperature of domestic economic prosperity, and if we see a downward trend with this, we may indeed be in for a rough ride.

How This Stacked Up Against Expectations

As for the retail sales report, the expectation among economists was that this number should come in flat, meaning no change. Any negative change therefore would fail to meet this expectation. The market prices in these expectations as consensus is reached on them, and when they fall short, this pricing needs to be adjusted accordingly.

When you go from expecting no change and get the worst retail sales report in almost 10 years, that’s a whole lot of downward pricing that has to take place. The 300-point total move downward on the Dow that we saw in the initial response to this may seem pretty dramatic on an intraday chart, but this move could have easily been much larger if the outlook of the market wasn’t positive to start with.

This report was so shocking that analysts at the Jefferies Group questioned the accuracy of the data, calling it “dreadful,” and perhaps even so dreadful that it is difficult to believe. As it turns out, the news is both dreadful and true.

Now that the markets have digested this news, we need to ask how meaningful such a number actually is to the overall health of the economy and the markets. It is just one month after all, and seeing this develop as a trend would be far worse than if this is more of an anomaly.

Analysts are concerned here, but not overly so, as this is just one of several factors taken into account when looking to forecast future results. Steve Chiavarone of Federated Investors remarks that “while there’s no denying that the retail sales number is no good and rotten, when you think about the low unemployment rate, that unemployment claims are still low, and that incomes are growing, there’s not that much other evidence that the consumer is unhealthy.”

Paul Hickey of Bespoke Investment Group is not so comforted by the employment data lately though, and points out that in addition to the negative jobless claim report we just saw, “job claims have now been steadily drifting higher within the four-week moving average reaching its highest level in over a year.”

We need to watch both these domestic economic indicators to see what direction they move. Today’s news is pretty disappointing, but it doesn’t necessarily mean that this data is deteriorating, and there’s way more things that move markets besides these two reports.

The response of the market has been rather encouraging so far, not looking to use this as an excuse for a big selloff or even bring us down to the lows we saw just a couple of days ago. When we look at it from a little higher up perspective, we can still observe more market positivity than negativity, and we’re still actually having a pretty good week overall so far even with this hit today factored in.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: eric@marketreview.com

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