Stocks finished mixed in a relatively quiet session on Friday as traders digested more disappointing economic news.
In the end, the Dow Jones Industrial Average gained 0.1%, the S&P 500 gained 0.1%, the Nasdaq Composite lost 0.1%, and the Russell 2000 lost 0.1%.
This time, it was a soft University of Michigan Consumer Sentiment report, which fell to 88.6 in May from 95.9 in April in what was the largest drop since December 2012. Combined with Wednesday’s weak retail sales report and underperforming same-store sales and earnings from the retail sector, and it looks like the U.S. consumer is in hibernation.
Ed Yardeni of Yardeni Research wonders if this is driven in part by higher spending on healthcare under Obamacare, while David Rosenberg at Gluskin Sheff thinks part of the problem is that shoppers don’t believe the recent gas price savings will last.
Whatever the cause, it only raises the odds the Federal Reserve waits on interest rate hikes this year.
Industrial production also missed expectations, dropping 0.3% for the fifth straight monthly contraction as factory activity stalls. Capacity utilization has returned to levels seen in late 2013/early 2014.
The tone of trade was defensive, with utilities leading the way after suffering earlier in the week on interest rate movements. The group gained 1.3%. Conversely, the drop in long-term yields hurt bank stocks on net interest margin concerns, pushing the group down 0.4% with Bank of America Corp (NYSE:BAC) falling 1%. Regionals were hit hard too.
Oddly, given the drop in consumer sentiment, retail stocks popped with the S&P Retail SPDR (NYSEARCA:XRT) climbing 1% on the back of a 5.2% gain in Macy’s, Inc. (NYSE:M) and a 6.5% move in J C Penney Company Inc (NYSE:JCP). Also in the category of oddities (it was an options expiration day, maybe explaining some of it) was the fact energy stocks gained 0.2% as a group while crude oil fell 0.1%.
And finally, everyone’s favorite over-the-top video provider Netflix, Inc. (NASDAQ:NFLX) rose 4.5% on reports in both the WSJ and Bloomberg that the company is in talks with potential partners to find a way to enter the Chinese marketplace.
For now, I’m continuing to focus on precious metals and the related mining stocks as they seem supremely positioned to benefit from the two big trends in play: Rising inflation expectations (on a later Fed hike timing window) and a rollover in the U.S. dollar (on the Fed but also relative economic strength vs. Europe).
Heading into next week, the big event will be the release of the April 29 Fed meeting minutes on Wednesday afternoon. The April statement acknowledged the rollover in Q1 earnings data which has since only worsened (with Wall Street estimates for Q1 GDP growth falling below -1%). The minutes will be scoured for clues as to how confident the Fed is that the slowdown is merely temporary.
Friday’s report on consumer inflation will also provide visibility on the likelihood of a Fed rate hike in September.