U.S. stocks closed the regular trading session mixed as more disappointing retail earnings reports coupled with a lower-than-expected advance read for April retail sales to hamper the consumer discretionary sector. Financials led the laggards as Treasury yields dropped on the heels of a cooler-than-expected inflation report; however, tech issues outperformed their peers to deliver a positive finish to the Nasdaq. The U.S. dollar was lower and crude oil prices were mostly unchanged, while gold managed minor gains.
The Dow Jones Industrial Average (DJIA) declined 23 points (0.1%) to 20,897, the S&P 500 Index ticked 4 points (0.1%) lower to 2,391, and the Nasdaq Composite increased 5 points (0.1%) to 6,121. In moderate volume, 776 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.01 to $47.84 per barrel and wholesale gasoline added $0.02 to $1.58 per gallon. Elsewhere, the Bloomberg gold spot price moved $2.79 higher to $1,227.84 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 99.22. Markets were mixed for the week, as the DJIA declined 0.5%, the S&P 500 Index lost 0.4%, and the Nasdaq Composite increased 0.3%.
Advance retail sales (chart) for April rose 0.4% month-over-month (m/m), below the Bloomberg forecast of a 0.6% gain, and compared to March’s upwardly revised 0.1% gain. Also, last month’s sales ex-autos were up by 0.3% m/m, south of expectations of a 0.5% gain, and following the positive revision to a 0.3% rise from the flat reading seen in the previous month. Sales ex-autos and gas were higher by 0.3% m/m, missing estimates of a 0.4% rise, and versus March’s favorably revised 0.4% gain. The retail sales control group, a figure used to help calculate GDP, rose 0.2%, compared to the projected 0.4% rise, and the prior month’s figure was revised higher to a 0.7% increase from the previously reported 0.5% increase.
Sales of building materials, electronics & appliances, and autos were higher for the month, while furniture, food & beverage, clothing and general merchandise sales declined. The bright spot was nonstore retail sales—which include online activity—as they rose 1.4% m/m and jumped 11.9% y/y. Schwab’s Director of Market and Sector Analysis, Brad Sorensen, CFA, discusses in his article, Consumer Discretionary Sector Rating: Marketperform, that the status of the U.S. consumer looks to us to be quite solid and is showing signs of improving, but the performance of the discretionary sector doesn’t always mirror the health of the consumer environment. Brad cites a shift in the spending mix, with online sales rising while traditional department store sales have been relatively tepid. Also, consumers seem to be somewhat reticent to spend on traditional retail items and underemployment is still a concern. Read more on the Markets & Economy page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.
The Consumer Price Index (CPI) (chart) was up 0.2% m/m in April, in line with estimates, while March’s 0.3% decrease was unrevised. The core rate, which strips out food and energy, rose 0.1% m/m, below expectations of a 0.2% increase and compared to March’s unrevised 0.1% dip. Y/Y, prices were 2.2% higher for the headline rate, south of forecasts of a 2.3% rise, while the core rate was up 1.9%, below projections of a 2.0% gain. March y/y figures showed an unrevised 2.4% rise and an unadjusted 2.0% increase for the headline and core rates respectively.
The preliminary University of Michigan Consumer Sentiment Index (chart) surprisingly improved this month to 97.7, from the prior month’s 97.0 level, where it was expected to remain. The current economic conditions component was unchanged m/m, while the outlook portion improved. The 1-year inflation forecast ticked higher to 2.6% from 2.5%, while the 5-10 year inflation outlook dipped to 2.3% from 2.4%.
Business inventories (chart) rose 0.2% m/m in March, matching forecasts, and versus February’s downwardly revised 0.2% increase. Treasuries traded nicely higher following the data, with the yield on the 2-year note declining 5 basis points (bps) to 1.29%, the yield on the 10-year note falling 6 bps to 2.33%, and the 30-year bond rate decreasing 3 bps 2.99%.
Stocks followed up a three-week winning streak with divergent performance as a waning earnings season provided a downside catalyst, while global conviction remained constrained by festering political uncertainty. Q1 earnings season is wrapping up with the retail sector putting on the final stamp, though disappointing sales results from Macy’s Inc. (M $24) and Kohl’s Corp. (KSS $36) fostered concerns, while Dow member Walt Disney Co’s (DIS $110) results showed continued struggles at ESPN to exacerbate uneasiness toward the traditional media industry. However, of the 452 companies that have reported Q1 results, about 64% have exceeded sales forecasts and 78% have topped earnings estimates, per data compiled by Bloomberg. Global political uncertainty remained as elections loom in Europe and as U.S. President Trump’s abrupt firing of FBI Director Comey appeared to cause concerns to flare up about the timing and possibility of promised business-friendly policy implementation.
Next week’s economic calendar will bring a plethora of data giving us a look at activity after the soft patch in Q1, with a focus on the housing sector in the form of the May NAHB Housing Market Index and April housing starts and building permits. Also, the week will end with April Leading Indicators, which will be preceded by last month’s industrial production and capacity utilization report.
As noted in the latest Schwab Market Perspective: Sell in May…or Settle In?, U.S. stocks are again trading near record highs and despite entering a traditionally soft seasonal time of the year, the investing landscape remains healthy. Economic data has improved since the seasonally-weak first quarter; on track for a June rate hike by the Fed (and at least one more after that this year). Meanwhile, earnings season has bested even elevated expectations and the fiscal stimulus remains on the horizon to the cheers of business leaders. Chinese economic indicators are showing signs of slowing, which could lead to a near-term retrenchment in emerging market equities. Read more on the Markets & Economy page at www.schwab.com.
Schwab Center for Financial Research – Market Analysis Group
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