What happened to all that selling? And the conviction that the U.S. economy ws headed for a recession?
The Standard & Poor’s 500 finished Thursday, August 15, with another up day for a 6-day rally that has pushed the index up 6.6%.Treasury yields surged with the yield on the 2-year Treasury, the maturity most sensitive to shifts in sentiment about the direction of Federal Reserve interest rate policy, climbing back above 4%.
The S&P 500 climbed 1.6% on the day. The Nasdaq 100 added 2.5%. The small-cap Russell 2000 gained2.5%. The CBOE Volatility Index, Wall Street’s “fear gauge,”the VIX, dropped back to near 15, below its long-term average, and hugely below its August 5 close at 38.57.
The proximate cause of the rebound rally? Three reports showing that the U.S.consumer is alive, well, and still buying stuff.
Retail sales grew by 1% in July. (The retail sales numbers are adjusted for seasonality but not for inflation.) Economists surveyed by Dow Jones had been looking for growth of 0.3%. Excluding auto-related items, sales increased 0.4%, also better than the 0.1% forecast.
There was also more good news in other government data. Initial unemployment benefit claims for the week ended August 10 totaled 227,000, a decrease of 7,000 from the previous week and lower than the estimate for 235,000.
The government good news was bolster by corporate good news. On August 15, Walmart (WMT) raised its sales guidance for the full year. The company said it now expects net sales to rise as much as 4.75% for the year, versus previous guidance for a gain of as much as 4%. It also raised its targets for operating income and profits.
The other reason for the market’s about face is that much of the drop in stock prices and the rally in bond prices wasn’t related to sentiment about the U.S. economy at all, but, as I’ve posted previously to an earlier than expected interest-rate move from the Bank of Japan that necessitated the rapid unwinding of speculative yen carry trade bets. Unwinding those trades required traders to sell dollar-denominated assets so they could repay yen-denominated borrowings. As those trades have been unwound, it’s taken selling pressure out of the U.S. markets.
Just as I advised not getting sucked into the recession fears panic two weeks ago–because while the U.S. economy was slowing none of the economic data signaled a recession–I wouldn’t get too euphoric now. The data still point to slowing U.S. economy (with the stagnation in China’s consumer sector posing a real risk to the global economy.)
The retail sales numbers were better than projected but they weren’t actually all that great. Growth in retail sales were driven by a month-over-month recovery in motor vehicles and parts from a June slump. Excluding that segment, retail sales rose just 0.4% last month, only slightly ahead of the estimated 0.3% overall gain.
And Walmart’s good news included a worrisome trend: buying by upper-income households are driving sales outperformance. That the wealthy demographics are flocking to budget-friendly Walmart isn’t exactly sign of above trend growth.
