U.S. markets followed the global pattern and were under pressure all day on Friday to produce significant weekly losses to snap the six-week rally. Markets were under pressure from the start on Friday, extending upon Thursday’s weakness where a number of Fed speakers reiterated the calls for rate hikes in December. The negative environment upon the open was mostly due to a weak retail sales report that raised growth concerns in the United States. Retail sales grew by only 0.10% from September versus expectations of 0.30%. The S&P 500 experienced some selling shortly after the open and attempted a late morning recovery that fell short. Ultimately the major averages rolled over into the afternoon to fall -1.12% and close at 2023.03. For the week as a whole the S&P was down -3.63% to record the worst weekly return since September. Trading volume picked up on Friday and was above average for the first time during the recent selloff. The advance/decline margin suggested broad selling across the board as three stocks fell for every share that managed to buck the negative trend on Friday. New lows expanded once again on Friday while the number of stocks reaching new 52 week highs was marginal. Beneath the surface there were some sectors that managed to finish in positive territory. Healthcare stocks recorded a small gain on Friday. The materials sector also managed to close higher. The technology sector finished lower on Friday but the real selling was in the consumer cyclical sector due to the poor retail sales data. Commodities continued their string of lower closes on Friday with oil leading the way down. Oil lost close to -2.5% on Friday and has now lost over 15% in the last two weeks. The bond market traded in mixed fashion to continue the overall trend from last week. Treasuries and investment grade corporate bonds rose marginally as interest rates sank. High yield bonds were under selling pressure yet again as the substantial decline in oil prices continues to weigh on the high yield bond complex.
One of the big drivers in the selling of stocks on Friday was the weak retail sales report which showed consumer spending grew at only 0.10% from September. Overall retail sales growth has only registered 1.7% in the year over year period since October 2014. This is disappointing on a number of fronts. First, the October employment report released earlier this month showed wages accelerating at the fastest pace since the late 90’s (2.5% year over year). Secondly, there was a lot of chatter late last year and early this year that the big year over year declines in the price of oil would result in increased consumer spending activity throughout 2015 which would be a key driver for U.S. economic growth. Unfortunately, the consumer has not been interested in spending more despite these two positive tailwinds throughout 2015. In fact, retail sales have been underwhelming throughout 2015 as there has not been one single retail sales report that was better than consensus economist expectations. Nine retail sales reports have missed expectations and only two have been in-line with economist estimates. Digging farther into the most recent retail sales report does show that consumer spending has been underwhelming throughout the balance of 2015. From the same period in 2014, the largest gains in retail sales have come in motor vehicles, bars and restaurants, and non-store retailers. Gas stations have been a significant drag on retail sales for the entirety of 2015 and have seen 1 year sales drop -2.13%. Online retailers have taken a massive amount of sales from traditional brick and mortar stores in 2015. All in all, we’ve seen a disappointing trend in consumer spending throughout the course of the year. There are without question factors at play that are holding back the consumer. Whether it is the consumer paying down debt, or increasing savings for larger ticket items, or psychological concerns that oil prices will resume their march higher from the early 2000’s, the consumer has been reluctant to spend despite some obvious tailwinds.
This morning markets are indicated to open slightly lower in reaction to the horrifying terror strikes in Paris on Friday. While the violence initially hit capital markets hard and caused a significant amount of volatility, markets have since regained the entirety of the initial reaction. There were a number of important global economic indicators released overnight. In Japan, GDP readings showed that the company slipped into a recession for the second time since Prime Minister Shinzo Abe came to power nearly three years ago. The double dip recession comes despite Abe’s best efforts to ramp up stimulus. On the surface this may be interpreted as negative, however it could mean that Japan will accelerate efforts to provide economic stimulus. In Europe, markets initially gapped lower in response to the tragic events in France last Friday but have since recovered almost all losses on the day. The short term negative reaction is certainly justified as travel and aggregate activity could slow in reaction to the terrorist attacks. However, if this does threaten economic growth it could result in additional stimulus efforts from Mario Draghi at December’s ECB meeting. It’s early to tell the full ramifications to economic growth as a result of the terrorist attacks, but it is likely to expect they could adversely impact economic growth. In domestic news this morning, Marriott has agreed to buy Starwood hotels to form the world biggest hotel chain in a deal valued at $12.2 billion. Oil prices are also continuing lower this morning which is worth noting given the recent pressure oil prices have put on the high yield bond and equity markets. It may be difficult for equity markets to sustain a rally without some stabilization in credit and high yield bonds given the influence high yield has had on equity prices lately.