DOW FALLS 185, STOCKS HIT ONE-MONTH LOW: Here's what you need to know

Stocks stumbled on Friday to finish a down week for markets as the major US indexes closed at their lowest level in about a month.

First, the scoreboard:

  • Dow: 17,535, -185, (-1%)
  • S&P 500: 2,046, -17, (-0.8%)
  • Nasdaq: 4,718, -18.5, (-0.4%)
  • WTI crude oil: $46.30, (-0.9%)

Retail

Retail dominated the news this week.

Mostly for bad reasons. And then Friday, finally, with some good news.

On Friday morning, the Census Bureau released the April report on retail sales, which showed sales rose 1.3% against the prior month and were up 0.6% when excluding auto and gas sales.

Expectations were for a 0.8% headline jump and a 0.3% increase ex autos and gas. The retail sales control group, which is comprised of the report’s components that feed into the consumption gauge for GDP, showed sales rose 0.9% in April.

So, a beat all around.

This report makes things look better for second quarter GDP — the Atlanta Fed’s latest GDPNow reading has second quarter growth tracking at 2.8% — but economists at BNP Paribas still remained cautious that this report signalled a turning point for the economy, writing, “The bounce back in retail sales is reassuring news but it does not mean the consumer is back to normal. Real income growth is slowing down and we would expect consumption growth to follow.”

But, again, the tone of Friday’s retail sales report was notably different from the corporate earnings we saw this week from big-box stores like Macy’s, Kohl’s, Nordstrom, and, on Friday morning, J.C. Penney. The “XRT” ETF which tracks the retail sector fell about 4.4% for the week.

Sales were down at these companies across the board and the outlook wasn’t much better.

And as Bob Bryan noted on Wednesday, one paragraph from Fitch Ratings summed up the problem facing modern big-box retail: the clothing isn’t exciting, the price point isn’t low or high, and inventory management is a colossal challenge.

Even excepting all the challenges the retail business inherently faces, the 800-gorilla looming over the industry is not going anywhere: online shopping.

Consumers

Elsewhere in economic data on Friday, the University of Michigan’s flash reading on consumer confidence in May showed a huge jump to 95.8 from 89.5.

Along with this report, Richard Curtin, chief economist for the survey, noted that nearly all of the gains came from consumers’ expectations about the future improving.

“Nearly all of the gains were in the Expectations Index, which rose to its highest level in nearly a year,” Curtin wrote. “To be sure, the data still indicated the negative impact of uncertainty about future economic policies associated with the Presidential election, but its overall impact was overwhelmed by favourable economic developments.”

Additionally, the latest producer price index showed prices ticked up 0.2% in April and 0.1% on a “core” basis, which excludes food and energy.

Taking all this together, Chris Rupkey at MUFG argued it was just a stellar day for the US consumer, writing in a note to clients that, “The key concerns that voters are said to have this election about the economy and about stagnant wages are diminishing on this one-two punch reading on the economy today of better consumer confidence and stronger retail sales. It looks like the economy is going to be ok after-all this year… Once again, things are better than you think. Way better.”

Top of Mind

Earnings season is basically in the books.

S&P 500 earnings were down about 7% in the first quarter according to FactSet, the fourth straight quarter of declines. On Thursday, we saw Binky Chadha at Deutsche Bank call for the end of the earnings recession and argue earnings growth will return in the second quarter.

In a note to clients on Thursday, analysts at Goldman Sachs also gave a “Beige Book”-style overview of what S&P 500 saw during the quarter which at least in the eyes of some may have marked the bottom for the earnings cycle.

(The Beige Book is a Federal Reserve report issued eight times a year that gives an overview of the US economy using anecdotes from business contacts across the country.)

Four things stood out: the US economy is growing at an unspectacular rate, buybacks will continue, the US dollar’s drag on sales is coming to an end, and Wall Street isn’t much worried about political risks right now.

And so as you’d sort of expect, the biggest companies in the US reflect themes we’ve hammered on for a few months arguing that things in the US economy aren’t great but also aren’t terrible.

The continued refusal of Wall Street to really see political risks — whether it’s a possible “Brexit” (or Britain leaving the EU), Donald Trump getting elected in the US, or political chaos in Brazil — as posing material impacts to the economy, however, stands out. We’ll see if this changes as these events, particularly the Brexit vote and US presidential election, draw nearer.

Additionally

Janet Yellen won’t rule out negative interest rates in the US.

Ben Bernanke doesn’t think the biggest US banks need to be broken up.

How Carson Block finds targets for his big short bets.

There was a tech IPO on Friday — it went well.

Why Apple made a billion-dollar bet on the Uber of China.

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