While investors have been rattled by escalating tensions between the U.S. and North Korea, the market is more likely to hinge on something more pedestrian in the coming week, namely, how much U.S. consumers are actually fueling economic growth.
Stocks finished down for the week Friday as the Dow Jones Industrial Average DJIA, +0.07% declined 1.1%, the S&P 500 index SPX, +0.13% dropped 1.4%, and the Nasdaq Composite Index COMP, +0.64% fell 1.5%, following a rough period where saber-rattling between the U.S. and North Korea inspired a pullback from record high levels. The CBOE Volatility VIX, -3.30% urged 55% over the week to finish at 15.51, largely considered to be a “normal” range of stock market volatility.
Tuesday not only brings with it the Commerce Department’s U.S. retail sales data for July, but also a number of traditional retailers will cap off earnings season with their reports. U.S. retail sales logged declines for both May and June.
With consumer spending estimated to fuel about two-thirds of the economy, Tuesday’s figures will be watched closely. Economists surveyed by MarketWatch expect a 0.2% decline in July retail sales.
It’s the growing disparity between how consumers feel about the economy and whether they actually open up their wallets that’s of concern to Brad McMillan, chief investment officer for Commonwealth Financial Network, in an interview.
“Even though there are high levels of consumer confidence, consumers still aren’t spending, so that gap between the walk and the talk is only getting more worrisome,” said McMillan.
The last reading for consumer spending showed growth of less than 0.1% in June, its most anemic monthly growth since January 2016, continuing a steady downtrend that’s existed since March. At the same time, the last reading for consumer confidence showed its second highest level in 16 years at 121.1 back in July. June’s reading was 117.3, which is similarly near 16-year highs.
“Spending growth is well below what it should be so that means one of two things: Either spending needs to grow faster or those surveys are overstating how confident the consumer really feels,” McMillan said.
Adding to the argument that consumer confidence figures are just talk, Peter Boockvar, chief market analyst at the Lindsey Group, said they should be taken with a grain of salt, and what really matters is hard data on whether consumers are actually spending money.
“That’s the case with a lot of confidence numbers since the election: None of them have translated into actual growth,” Boockvar said in an interview.
In addition to retail sales data, Boockvar said he’ll be paying particularly close attention to Home Depot Inc. HD, +0.65% earnings on Tuesday as a measure of consumer spending. The analyst said Home Depot is the latest large traditional retailer that’s caught in the crosshairs of online retail giant Amazon.com Inc. AMZN, +1.16% which expects revenue to continue to rise even though spending is cutting into profits.
Other traditional retailers report earnings during the week include TJX Cos. TJX, +1.15% on Tuesday; Target Corp. TGT, +0.02% on Wednesday; along with Wal-Mart Stores Inc. WMT, -0.32% Gap Inc. GPS, +0.43% Ross Stores Inc. ROST, +1.39% L Brands Inc. LB, -0.87% and Foot Locker Inc. FL, +0.43% reporting on Thursday.
On Wednesday, minutes from the Federal Reserve’s July policy meeting will be released but that’s become less of a market-moving event. Much of that has to do with speeches from central bank members that follow policy meetings, said Lindsey Group’s Boockvar, who doesn’t expect the FOMC minutes to significantly change the 36% probability of a rate hike in December.
If anything, the minutes may provide some more clarity on the Fed’s plans to begin unwinding its $4.5 trillion balance sheet in September, said Commonwealth’s McMillan.