https://www.profitconfidential.com/economic-analysis/worst-kept-secret-wall-street/

The Worst Kept Secret on Wall Street

Michael Lombardi, MBA

Profit Confidential

2014-06-02T09:42:32Z

2017-07-27 01:54:31

As financial analyst Michael Lombardi writes, "consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting."

Economic Analysis

https://www.profitconfidential.com/wp-content/uploads/2014/06/Why-Retail-Stocks-Will-Get-Hit-the-Hardest.jpg

In the first quarter of 2014, Retail Metrics, a retail industry research firm, found U.S. retailers missed their corporate earnings estimates by the most since the year 2000!

As I have been writing, consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting.

Last month, the Thomson Reuters/University of Michigan’s consumer sentiment index declined three percent from a month earlier. It was 84.1 in April, and it declined to 81.8 in May. (Source: Reuters, May 16, 2014.)

But consumer confidence is just one leading indicator that suggests consumer spending will decline in the U.S. economy; the unemployment situation and wages suggest the same.

The worst kept secret on Wall Street is that the big U.S. retailers are in trouble. While stocks, in general, have held their own this year (up about one percent so far in 2014), the stock prices of retail stores have fallen sharply. The chart below is of the Dow Jones U.S. General Retailers Index. The chart clearly shows the stock price of big U.S. retailers are falling quickly, down more than seven percent in the first five months of this year.

Chart courtesy of www.StockCharts.com

The story that consumer spending suffered in the first quarter of this year because of bad weather doesn’t sit well with me—I simply don’t buy it. The U.S. economy contracted one percent in the first quarter of 2014, the first time our economy has experienced an “official” contraction since the first quarter of 2011 for the simple reason that consumers are tapped out; their incomes are not keeping up with inflation.

All we need is one more quarter of “unexpected” contraction in U.S. gross domestic product (GDP), and we’ll be back in a recession. (I’m sure that will do wonders for confidence and consumer spending.) And when this stock market finally starts heading south as investors figure out there’s not much substance behind its advance, my bet is that the retail stocks will get hit the hardest, because they’re already the weakest!