State of the Stock Market Analysis for the Week Ending May 15th, 2016 (Consumer Sentiment Skyrockets 5-15-16) All You Need Is Jobs

It was a surprising Friday for the stock market, especially since investors were expecting a disappointing set of numbers in terms of retail sales and consumer sentiment. After all, last week’s dismal jobs report showed that just 160,000 new jobs were created in April, and the thought was that the U.S. economy was up against the ropes. Well, the numbers we saw on Friday were actually very strong, as retail sales for April rose 1.3% versus the expected 1.0% increase. That was also a big improvement on March’s 0.3% decline, so it was a surprise that most bulls thought that would lead stocks higher.

The University of Michigan’s consumer sentiment report for May also topped expectations as it jumped up to 95.8 versus April’s 89.0. This beat expectations of 89.5, and it showed that consumers might have been a bit depressed lately, but they are definitely not out of the ball game. The stock market was slightly higher in early Friday action and treaded water near break-even through midday, but the sellers appeared in the afternoon and stocks closed out the week on a negative note. For the week, the Dow lost 1.0%, the Nasdaq fell by 0.4% and the S&P 500 slipped by 0.5%.
Here we are in mid-May, and the S&P 500 is essentially flat for the year, and the Nasdaq is down 5.8% for the year, so this reminds us of what a challenging year it has been. Earnings season has been lackluster at best, and economic news continues to come in weak. That is why Friday’s retail sales numbers and consumer sentiment were such a surprise. Had those numbers been bad, we probably would have seen a big stock market rally. This is discouraging for the bullish camp because it is usually a negative to see the stock market fall on positive economic news.
So why did stocks fall on this “good” consumer news? Well, the first thought that came up was that Friday’s retail and consumer news re-opened the door for a possible June rate hike by the Federal Reserve. A rate hike seemed impossible in June thanks to a weak earnings season and the deterioration in the employment picture, but if consumers are feeling and acting optimistic, then maybe a rate hike COULD once again be in the cards for the Fed’s June meeting. The thought is that if not June, then maybe a Fed rate hike could come sooner than early 2017. This might partly explain Friday’s market retreat.
We all know how the stock market reacted to December’s 25-basis-point rate hike by the Fed, and the last thing the Fed wants to do is set in motion another 10% decline in the S&P 500. Friday’s late-day slide, in a sense, telegraphed to the Fed that “good news” is making investors a bit nervous. And a shaky stock market might be enough to keep the Fed on the sidelines with a rate hike until 2017, even if we do see improving economic news in the days and weeks ahead.
With regard to the Federal Reserve, it also historically has prided itself on not being politically motivated, and with the November elections on the way, and a presidential race that could be up for grabs, the Fed probably wants to lay low and do as little as possible as we head toward November. If it really wants to raise rates again, June would probably be a good time to do so, but then again, what happens if the stock market goes into a nosedive ahead of the summer conventions for the Democrats and Republicans?
This scenario should make for an interesting six months that could be challenging for investors and markets alike. The big positive right now is that consumers are spending, and confidence is rebounding. Retail sales for May were up, but it appears that consumers are buying more and more through Amazon (AMZN) and not buying in brick-and-mortar stores. Retailers like Macy’s (M) were hit hard by earnings shortfalls, but retail sales were up in a big way through sales channels like Amazon Prime. It is a lot easier to “click” than to drive to a mall, and that is a trend that is likely to continue.
The S&P 500 is flat for the year, so in terms of market performance, the rest of 2016 is up for grabs. That said, the Gorilla wishes each and all a relaxing mid-May weekend, and we will be back in action on Monday. It has been a rough-and-tumble 2016 thus far, but the stock market is holding its own following the late-February bounce. This has bulls feeling optimistic for the rest of 2016, so stay tuned. Again, have a great weekend!

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