Worst Month For Retail Stocks Since November 2008

Tariff Fears Push Stocks Even Lower

President Trump’s new 5% tariff on Mexican exports caused stocks to crater on Friday. To be clear, tariffs aren’t the only catalyst of this recent swoon in stocks. Stocks are falling because earnings estimates and economic reports have been putrid. That being said, worries about the trade wars are causing businesses to be more cautious about Capex and hiring plans. Everything is intertwined. Trade uncertainty could be the catalyst that pushes this weak economy into a recession.

Specifically, the S&P 500 fell 1.32%, the Nasdaq fell 1.51%, and the Russell 2000 fell 1.35% on Friday. The VIX increased 8.15% to 18.71. VIX can easily get above 20 before this correction is over. Volatility caused the CNN fear and greed index to stay at 24 which is extreme fear.

S&P 500 is now down 6.58% from its record high in April. The S&P 500 can easily fall 10% before the correction is over. If the Fed doesn’t guide for rate cuts at its June 19th meeting, the market will probably revisit its December low.

Utilities finally rallied as they increased 0.45%. Only other positive sector on Friday was real estate which increased 0.77%. Two worst sectors were communication services and energy which fell 2.04% and 1.62%.

Oil has been crashing hard on fears of a slowdown and trade war. WTI fell 5.5% to $53.50. That’s the lowest level since March 8th. This decline makes it highly likely that headline inflation will stay below 2%.

Retail stocks cratered all month. It was the worst month for the XRT retail ETF since November 2008. The table below shows the declines in these names.

Month to date, Sprouts Farmers Market, Walgreens, and Best Buy were down 7.24%, 7.62%, and 15.27%. The carnage is occurring partially because the latest round of tariffs on China will affect consumer goods and partially because the economy is in a sharp cyclical slowdown.

The Consumer Isn’t Spending

If the consumer doesn’t pick up its spending growth from Q1, GDP growth is going to be very weak in 2019. I’m expecting below 2% growth in both Q2 and Q3. Next week the first Q3 Nowcast will be released by the NY Fed.

As you can see from the chart below, real consumer spending growth on big ticket items like cars is the lowest since the expansion was just getting started. Real residential investment growth is already negative. If it wasn’t for falling interest rates, home price growth would be negative.

Keep in mind, this weakness is all occurring with the unemployment rate at 3.6%. If the labor market weakens, we will see a recession. A weak May labor report would be enough to stoke recession fears because of the other weak reports.

The May BLS report comes out next Friday. Consensus is for 180,000 jobs created. You would think job growth would be solid because of the low unemployment claims, but I’m uncertain since there have been so many other weak reports.

New Trade War With Mexico

The trade war with Mexico spooked investors on Friday because it was so unexpected. There could be a 25% tariff on all Mexican goods by October. A 25% tariff on $350 billion worth of Mexican goods will raise $90 billion in customs duties and increase domestic prices by at least 0.4%.

U.S. exports to Mexico are equivalent to 1.3% of GDP. America could be hit with a retaliatory tariff from Mexico. The decline in the Mexican Peso means the 5% initial tariff will be fully offset with no changes to prices. Mexico is America’s 3rd largest trading partner; 16% of U.S. goods exports go to Mexico.

As you can see from the chart below, 29.1% of Mexico’s economy is goods exports to America. The largest category is vehicles; in 2015 America imported $74 billion worth of vehicles from Mexico.

When you add in America’s foreign direct investments into Mexico and remittances, 40% of Mexico’s economy is related to the American economy. In this new trade war, President Trump has more leverage than in the trade war with China.

Treasuries Explode Even Further

I think the rally in treasuries is overdone. I know that yields have been a falling knife and that globally yields have been plummeting, but at a certain point enough is enough.

German 10 year yield fell to -21 basis points which is its lowest yield ever. American 10 year yield is approaching a 1 handle. Specifically, the 10 year bond yield fell 9 basis points on Friday to 2.12% which is a 20 month low.

The 2 year yield fell an astounding 14 basis points to 1.92% as the market is beginning to price in multiple rate cuts this year before the Fed has even guided for one cut.

Spread between the 10 year yield and the 2 year yield increased 20 basis points. Most of the curve is below the Fed funds rate because the Fed is out of step. I need to see more of the curve invert before I predict a recession.

Now I just see a similar sized slowdown to 2015-2016. This slowdown is broader though. Odds of at least one rate cut by the end of the year are 94.1%. The odds of at least 2 rate cuts this year are 70.3%. That means the stock market might be disappointed if the Fed only guides for one cut at its June 19th meeting.


Retail stocks led the charge lower in May as the XRT retail ETF fell 12.32%. The market was weak on Friday because of the new tariff announced by President Trump that will go into effect on June 10th.

That’s on top of the new tariff on China and China’s new tariff on America which just went into effect. The economy is cyclically weak. This is a terrible time for there to be a negative catalyst like a trade war. 

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