The Week In Review

5/13/16

The stock market ended a downbeat week on a lower note as equities pulled back following continued weakness from the retail sub-group. Additional focal points included the S&P 500 (-0.9%) breaching technical support at its 50-day simple moving average (2054.74), mounting selling pressure from the oil pit, a leg higher in the dollar, and weakness from the heavyweight financial (-1.3%), industrial (-1.2%), and consumer discretionary (-1.2%) sectors. The Dow Jones Industrial Averages (-1.1%) finished behind the S&P 500 (-0.9%) and the tech-heavy Nasdaq (-0.4%).

The major averages opened on a mixed note as investors weighed a positive reading of April Retail Sales (+1.3%; Briefing.com consensus +0.8%) against continued weakness in the retail space. Reports from Nordstrom (JWN 39.16, -6.07) and Dillard's (DDS 59.86, -0.78) capped off a bad week for the group as both offered below-consensus results for their quarters.

Equities were unable to find their bearings as a persistent downturn in crude oil and strength in the dollar kept pressure on the broader market. The S&P 500 (-0.9%) tested and defended support near its 50-day simple moving average (2054.74) in the late morning, but was unable to do so again when retesting that level in the early afternoon.

The major averages ebbed lower through the afternoon as heavily-weighted financials (-1.3%), industrials (-1.2%), and consumer discretionary (-1.2%) extended their losses to round out the leaderboard. For its part, WTI crude ended its week on a down note ($46.22/bbl; -0.9%), but still finished with a gain of 3.7% since last Friday's settlement at $44.59/bbl.

In the industrial sector (-1.2%), rail names ended with larger losses as Norfolk Southern (NSC 85.97, -2.21) and Kansas City Southern (KSU 87.97, -2.21) finished the day lower by 2.5% apiece. The industrial group showed broad-based weakness as construction machinery names and aerospace and defense names all ended with meaningful losses. Furthermore, the Dow Jones Transportation Average (-1.2%) erased its 2016 gain and is now flat for the year.

The financial sector (-1.3%) saw weakness in money center banks and real estate investment trusts (REITs). The largest losses among REITs came from those with primary holdings in retail properties. The names moved lower during the week as they traded lower with the SPDR S&P Retail ETF (XRT 41.04, -0.57). Simon Properties (SPG 196.49, -5.95) and General Growth (GGP 27.67, -0.46) extended their weekly declines to 6.8% and 5.9%, respectively.

Retail names continued to underperform in the consumer discretionary space (-1.2%). Nordstrom (JWN 39.16, -6.07) ended its day lower by 13.4%, finishing the week down 18.5%. Elsewhere, Macy's (M 31.22, +0.01) and Kohl's (KSS 35.74, +0.59) outperformed.

Conversely, health care (-0.2%) and technology (-0.3%) finished the day with the slimmest losses. In the health care space (-0.2%) biotechnology showed relative strength, evidenced by the 0.9% gain in the iShares Nasdaq Biotechnology ETF (IBB 253.90, +2.17).

Treasuries ended on a mixed note with the 10-yr note ending near its best level of the session. The yield on the 10-yr note slipped five basis points to 1.70%.

Volume was heavier than average with 854 million shares trading at the NYSE. The advance-decline line favored decliners at the NYSE by a 2-to-1 margin.

Today's economic data included Core PPI for April, Retail Sales for April, March Business Inventories, and the preliminary reading of the University of Michigan Consumer Sentiment Survey for May:

The index for final demand was up 0.2% (Briefing.com consensus +0.3%), driven by a 0.1% increase in the index for final demand services and a 0.2% increase in the index for final demand goods.

The Producer Price Index for April didn't upset the inflation apple cart.

The index for final demand, excluding food and energy, was up 0.1% as expected.

On an unadjusted basis, the final demand index was unchanged for the 12 months ended in April after being down 0.1% in March.

Excluding food and energy, the final demand index was up 0.9% versus up 1.0% in March.

The April Retail Sales report was much better than expected. Total retail sales increased 1.3% month-over-month (Briefing.com consensus +0.8%).

That gain was fueled by a 3.2% increase in auto sales, a 2.2% jump in gasoline station sales, and a 2.1% uptick in sales at nonstore retailers.

Excluding autos, retail sales increased 0.8% (Briefing.com consensus +0.5%) on top of an upwardly revised 0.4% increase (from +0.2%) in March.

The retail sales gains in April were fairly broad-based. The only decline seen was in building material, garden equipment, and supplies dealers (-1.0%), which might have been impacted from the unseasonably cool spring temperatures. General merchandise store sales were flat, yet department store sales were reportedly up 0.3%.

This is a good report that will feed favorably into Q2 GDP forecasts based on the recognition that core retail sales, which exclude auto, gas, building material, and food services sales, increased 0.9%.

These sales factor into the computation of the goods component for personal consumption expenditures.

Total business inventories increased 0.4% in March (Briefing.com consensus +0.2%) after an unrevised 0.1% decline in February.

Manufacturers' inventories (+0.2%) and wholesaler inventories (+0.1%) were already known.

Retailer inventories were the only unknown and they increased 1.0% on the heels of a 0.7% increase in February.

The biggest driver of the increase in retailer inventories was a 2.3% increase in motor vehicle and parts dealers inventories.

The only retail category seeing an inventory decline in March was food and beverage stores (-0.8%).

The total business inventory-to-sales ratio was 1.41 in March, which was unchanged from February but up from 1.37 in March 2015.

The University of Michigan's Preliminary Consumer Sentiment report for May brought some good news to the market as the index spiked to 95.8 from the final reading of 89.0 in April.

The Briefing.com consensus estimate was pegged at 90.0.

The uptick was attributed largely to an improved outlook among consumers due to more frequent income gains, a better jobs outlook, and the expectation of lower inflation and interest rates.

Those views were reflected in the Expectations Index, which surged to 87.5 from 77.6 in April.

The Current Economic Conditions Index also improved, rising more modestly to 108.6 from 106.7.

In the same period a year ago, the Index of Consumer Sentiment stood at 90.7.

May marked the first time in four months that there was an increase in consumer sentiment.

Monday's economic data will be limited to Empire Manufacturing for May (Briefing.com consensus 6.2) and the May NAHB Housing Market Index (Briefing.com consensus 59), which will be released at 8:30 ET at 10:00 ET, respectively. Separately, March Net Long-Term TIC Flows will be released at 16:00 ET.

Nasdaq Composite -5.8% YTD

Russell 2000 -2.9% YTD

S&P 500 +0.1% YTD

Dow Jones +0.6% YTD

Week in Review: Searching for Direction

After registering two consecutive weekly losses, the stock market faced a range-bound week, which ended with a modest slip for the S&P 500. The benchmark index surrendered 0.5% for the week while the Nasdaq Composite outperformed slightly, shedding 0.4%.

The trading week featured a fair dose of economic data, which included an in-line Core PPI reading for April (+0.1%) and better than expected April Retail Sales (+1.3%; Briefing.com consensus 0.8%). The dollar responded by continuing its rebound off the 2016 low that was registered on May 3. The Dollar Index added 0.7% for the week, settling near levels from late March/early April.

Market participants received another batch of quarterly earnings during the week, but the results did not have a far-reaching impact. At the end of the week, nearly 92.0% of S&P 500 components had reported their results. Blended earnings were down 7.0% year-over-year while earnings on a reported basis were down 7.6%.

Investors heard from a handful of Fed officials throughout the week with some cautioning that the possibility of a rate hike in June should not be dismissed entirely. The fed funds futures market, however, remains convinced that the next rate hike will not come before December. The market is pricing in just an 8.0% likelihood of a rate increase in June while the probability of a December hike is at 62.0%.