Bottom Line
For the first time in six months, economic growth concerns weighed on markets last week and while there were other negatives (including hot inflation data and underwhelming earnings reports), it was a concern about growth that pressured stocks. Put plainly, over the past week and a half, investors have been confronted with some surprisingly soft economic data and anecdotally negative commentary on the consumer, and those disappointing reports are raising fears that all the policy related uncertainty emanating from Washington is starting to cause a loss of momentum.
More specifically, the soft retail sales report from two Friday’s ago, last Friday’s suddenly weak flash services PMI (Purchasing Managers Index consists of 5700 indicators) and the underwhelming WMT guidance (Walmart guidance) is making investors concerned that the now month-long barrage of tariff threats (along with the host of other chaotic headlines emanating from the administration) is starting to actually weigh on consumer behavior. If both continue, that could lead to a real slowing of growth.
Now, none of this is conclusive and I can make the case that the soft retail sales were skewed by bad winter storms and the LA fires, that the WMT guidance wasn’t an indictment of the consumer and the flash services PMI could be an aberration. But this is a market that is still trading near 22X earnings and as we and others have been saying, that leaves no room for error and that includes even a mild uptick in fears that growth may slow in response to policy uncertainty and chaos.
Again, this matters because solid economic growth remains the foundation upon which this rally has been built. And if that foundation comes under attack, then it throws into question the entire rally itself and opens this market up to a bear-like decline (on the order to 20%).
To be absolutely clear, I’m not saying that happened last week or that it’s happening now, but prior to last week the market gave no allowance for it and after the soft data and WMT earnings, it’s giving some allowance to it and that caused stocks to drop. If this persist we may switch to a more balanced position in our portfolios.
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