Change text size

• Email This Article
• Print This Article
• Subscribe

The economy hasn’t gotten much play this week, but that has changed on Friday. Heading into the weekend, the major market indices are moving lower on a couple of weaker than expected economic reports. The University of Michigan consumer sentiment survey and the August retail sales report have combined with Thursday’s jobless claims data to put pressure on stocks.

Retail sales rose an impressive 0.6 percent in August, but the problem has been that economists were expecting growth of 1.3 percent, which would have matched July’s gains. On a year over year basis, growth sits at 5.4 percent, a very healthy advance. Within the report, growth when autos are excluded came in at 0.7 percent. Overall, growth was broad-based, with just clothing and accessories, nonstore retailers and building materials dealers seeing declining sales. However, year over year growth is positive across all segments of the retail sector, with electronics and appliances stores seeing the largest growth at 10 percent.

The problem that retailers could have is that continued weakness in the jobs market could create less confidence and less spending. So far, lower tax withholdings and tax rebate checks have kept spending strong, but if interest rates continue to rise, these inflows will not be enough to keep spending on an upward path. In fact, consumer confidence has been declining since May as shown by the University of Michigan consumer sentiment survey.

This survey was expected to rise in September to 90.4 from 89.3 in August, but sentiment actually fell 1.1 points to 88.2. In May 2003, sentiment hit a high at 92.1, but has since slowly made its way lower. Nonetheless, sentiment is still well above the lows reached in March near 78. Even so, confidence has fallen in three of the past four months.

Within the report, we see that both the expectations and present conditions components fell in September. The expectations component sits at 81.3, down 1.2 points, with the present conditions index at 98.8, down from 99.7. It seems that consumers are starting to come down from the recent bout of tax cuts and rebate checks. At the same time, interest rates have been rising and this has combined with a weak jobs market to create some concern. Right now, consumers are on the fence, not sure what is going to happen in the near future. This means that economic and earnings news in the next few months could have a major impact on confidence and consumer spending. If the jobs market continues to deteriorate, it could create a further decline in confidence and spending. However, an improvement for the employment situation and further economic growth could convince consumers that stocks are worth buying.

The other report released today was the Producer Price Index [PPI]. This measure of inflation at the producer level rose 0.4 percent in August. This was in line with estimates, though a rise in energy prices accounted for most of the rise. Excluding food and energy, prices for intermediate goods rose just 0.1 percent. What this means is that the Fed has little reason to raise rates to combat inflationary pressures. In fact, with the jobs market still a major concern, the Fed is likely to remain quite accommodative.

Overall, economic news slowed down a bit this week, after showing very positive results during the past month. As a result of this positive news, stocks have risen quite sharply. However, with a large portion of the positive news priced into stocks, it could be difficult for the major market indices to move substantially higher in the short term. At the same time, if economic and earnings news disappoints, it could lead to some heavy profit taking.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody's Forum 

• Email This Article
• Print This Article
• Subscribe

Recent Articles by Jody Osborne, Optionetics.com

• July 30, 2010
  Closing Wrap-Up, July 30
• July 30, 2010
  Morning Watch, July 30
• July 29, 2010
  Economic Watchdog, July 29
• July 29, 2010
  Closing Wrap-Up, July 29
• July 29, 2010
  Morning Watch, July 29