Slight Correction, Nothing Serious
The stock market fell slightly Friday with the S&P 500 down 0.18%. The market had a bad week as the S&P 500 is about 2% off its high. CNBC has a weird headline saying the market rallied on Steve Bannon’s resignation from his role in the White House even though it was down on the day. That seems to me like a politically motivated headline. It was another one of those days where the VIX tracked the market as the VIX was down 8.30% to 14.26. This minor selloff which has basically consisted of two down days put into context is a ‘nothingburger.’ As you can see from the chart below, the number of moves exceeding 5%, 2%, 1%, and 0.5% are near their 50-year lows. There might be some large moves coming in the fall, but in the next two weeks, I don’t see a new trend developing as the volume will be low in the dog days of summer.
Economic Updates
For the rest of this article we’ll look at the economic reports which came out. They were mostly positive despite slight weakness seen in the stock market. The first report we’ll look at is the Philly Fed Manufacturing Business outlook. As you can see from the chart below, the current diffusion index fell slightly from 19.5 to 18.9 in August. The 6-month forecast increased from 36.9 to 42.3. The new orders index shot higher from 2.1 to 20.4. The prices paid and prices received indexes went up slightly, but there’s nothing that would indicate accelerating inflation. Overall, this was a solid report which is consistent with the Empire State Manufacturing report which showed the manufacturing industry is doing well.
On the industrial production front, growth rose 0.2% in July which was below expectations for 0.3%. Factory production fell by 0.1% because of weakness from autos. Manufacturing this year has been helped by the weakness is the dollar which makes it relatively cheaper to produce goods here. It’s also helped by the improvement in energy prices. Leading indicators increased 0.3% which was in-line with expectations. The 3 tenths of a percentage point decline sequentially came from the weakness in housing permits.
Another important report released on Thursday was the e-commerce retail sales. As you can see from the chart below, the seasonally adjusted annual run rate of quarter over quarter sales growth was 4.8%. This chart is confusing because it says the data is seasonally adjusted, but the growth always falls in Q4 and peaks in Q2. That may be a problem with the adjustment factor. Either way, the most impressive part was that e-commerce increased its market share of total retail by 4 tenths to 8.9%. This relentless march higher has been painful for physical stores as their bankruptcies pile up. This year’s results were the tipping point for many locations apparently.
It’s tough to be in retail because there’s only certain items you want to buy in real life. Dick’s stock crashedon Tuesday by 23% because of this shift to online buying. Apparel is the worst segment to be in. Physical retail needs a reset. Firms need to only sell items that people need to test out in real life like a bicycle or hockey skates. Dick’s might be in a bind because its stores are so large. The rule for investors should be that the business model for a retailer is broken until proven otherwise.
For greater context on this metric, the e-commerce sales were up 16.2% year over year while total retail sales were only up 4.1%. The sequential 4.8% growth online compares to 0.5% growth in retail. It may be strange to see online sales gaining so much considering online has been prevalent for a while. The growth areas are coming from the traditionally bought in-store items such as groceries. The key for physical retail in the future will be investing in technology to make it easier to shop. The only advancement we’ve seen in the past few years has been cashier-less checkouts which often don’t work. This is probably the motivation behind Amazon buying Whole Foods. They disrupted retail by expanding online sales and now they’re about to disrupt physical stores. Amazon is thinking out of the box by eliminating the checkout process entirely. It’s a great business to disrupt because retailers don’t have much of a technology budget. Amazon has weakened them so much that they can barely stay in business let alone invest in new technology. The only real competitor to Amazon is Wal-Mart.
The chart below shows the optimism on Q3 GDP is increasing as the Atlanta Fed’s GDP forecast improved to 3.8% because of the residential construction numbers. In a previous article, I said the NY Fed’s GDP forecast would increase this week because of the retail sales report. That happened as the forecast reached its highest level, 2.09%. The retail sales growth had a 0.08% positive impact on the estimate and the Empire State Manufacturing index had a 0.10% positive impact leading to 0.13% total growth. In two weeks, the NY Fed’s Q4 forecast will come out which will be interesting to see. In two weeks, the Q2 revision to GDP will come out which I’ll also be watching. The St. Louis Fed’s forecast for Q3 is 3.47% which is the 5th highest forecast in 4 years. Q3 is shaping up well, but we only have about 35% of the data, so it’s still too early to make final judgements.
3.8%GDP CHART
Conclusion
The stock market still isn’t volatile even though it’s down 2% off the highs in a micro dip. We are in a role reversal from earlier this year. Early in the year, stocks were rallying quickly in the face of a terrible Q1 GDP report. Now the Q3 GDP report looks great and stocks are selling off. It’s tough to ascribe reasons for this selloff because it’s so small and the economic data is so great. We need to see a 5% pullback before I can come up with a catalyst for the selloff. The media likes to ascribe reasons for every minor move in stocks, but sometimes it’s not conclusive what caused certain movement
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