U.S. equities finished mixed on Monday as traders returned from the long Easter holiday. The session was relatively quiet, with no major catalysts; just a nagging heaviness as a mid-day rally was largely reversed into the closing bell.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 managed a 0.1% move higher, the Nasdaq Composite took a 0.1% haircut and the Russell 2000 finished the day 0.1% higher.
Treasury bonds moved higher, the dollar weakened, and gold and crude oil both lost a touch. Volume was light, with 706 million shares trading on the New York Stock Exchange — just 64.5% of the 30-day average.
Consumer discretionary stocks led the way higher with a 0.5% gain, followed by materials and consumer staples. Footwear retailer Finish Line Inc (NASDAQ:FINL) gained 12.2% after it was upgraded by BB&T analysts on strategy changes. Utilities lagged, losing 0.4%. Pandora Media Inc (NYSE:P) lost 12.2% amid a management shakeup.
Investors were focused on weaker-than-expected personal spending data. While February’s numbers came in as expected there was a big downward revision to January’s result that resulted in the Atlanta Fed downgrading their tracking estimate of Q1 GDP growth to just 0.6%. This is down from 1.4% previously and 1.9% last week.
Recently, stocks have tracked the ups-and-downs of the economy with a slight lag — suggesting that stocks could be pulled lower in the weeks to come as a result. The downward trend is clear. The “GDPNow” estimate from the Atlanta Fed is down from the 2% result posed in Q3 15, the 2.2% average growth rate seen in the first three quarters of 2015, and the 2.4% advance seen in 2014.
The problem, it seems, is that strength in consumer spending (primarily on services) is fading despite relatively stable income growth. Shoppers simply remain cautious at a time when they need to be aggressively offsetting the slowdowns in corporate profitability and factory activity driven by falling labor productivity/rising labor costs, low energy/commodity prices and currency volatility.
Capital Economics now estimates first-quarter real consumption growth is likely to clock in at around a 2% annualized rate — down from the 2.4% rate seen in the fourth quarter of 2015. A “disappointment given that employment continued to grow at a solid pace in the first quarter and households enjoyed a further boost in purchasing power from even lower energy prices.”
The trouble is that since the second half of 2010, according to Ed Yardeni of Yardeni Research, U.S. economic growth has been near its historical “stall speed” of around 2% — a subdued level of growth that has tended to tip the economy into recession. Each of the last 11 recessions was preceded by a drop in real GDP growth to 2%.
The continuation of the Federal Reserve’s ultra-cheap monetary policy has kept things going, but that’s under threat now as the Fed continues to hint at further rate hikes in response to a low unemployment rate and evidence inflation is firming.
At this point, a turnaround in economic growth depends on consumers opening their wallets. And that’s far from assured with the savings rate increasing to levels not seen since 2012.
For now, I continue to recommend defensive positions to subscribers such as the ProShares UltraShort Bloomberg Crude Oil (NYSEARCA:SCO) which gained 0.9% for Edge subscribers today.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
