U.S. benchmarks managed to close higher on Thursday but the beneath-the-surface narrative was disconcerting, if wholly predictable.
Throughout Q4, those of a cautious persuasion variously warned that guide downs were coming or that, at the very least, the tone from corporate management teams was likely to turn decidedly more cautious as we head into earnings season.
The risk with the trade war was always that it wouldn’t be resolved by the time the stateside fiscal boost waned, leading to a scenario where tariff effects (both “real” in the form of price pressures and crimped margins and “psychological” where that means consumers get jittery, sentiment sours, etc.) start to show up just as the stimulus wears off and the Fed pushes policy dangerously close to “restrictive” territory.
All of that began to play out starting in November and ultimately manifested itself in GM’s decision to slash jobs and close plants, guidance cuts from FedEx and Apple, warnings from Micron, a “shock” miss from Samsung, and on Thursday, a guide down from Macy’s.
Macy’s cut its annual profit and sales forecast and that catalyzed a harrowing plunge. The shares dropped an astonishing 18% on the day. Maybe you noticed.
Kohl’s also dove after the company said November and December comps rose just 1.2%, far lower than last year’s holiday season and well short of Cleveland Research’s already lowered estimate. This was one of the six worst days of the past year for the retailer.
The retail ETF recovered some ground over the course of the session, but the 50-day moving average just got a little further away and the move lower was on extremely high volume.
Now look, you can write this off to whatever you like and regular readers know we only spend time on individual companies when there’s a compelling reason to do so in the macro context. We would argue that this is one of those times.
It’s entirely fair to suggest that any further weakness you see come through in retailers and/or any further signs that the holiday shopping season was perhaps not as “big league” as hoped, is evidence to suggest the U.S. consumer was discouraged by market volatility and/or rattled by turmoil in D.C.
Incessant news coverage of the December selloff and Donald Trump’s real-time Fed criticism probably didn’t help. Trump’s tweets about the December Fed meeting focused the nation on something the vast majority of people would never have paid any attention to whatsoever under normal circumstances: the prospect that one more incremental Fed hike might push the economy into recession.
Speaking of “retail” sentiment and the December selloff, let’s switch gears quickly and talk about “retail” in another sense of the word. Late last month, Barclays suggested that the equity market mayhem “showed signs of being the infamous ‘retail flush’.”
“Retail investors [are] suddenly pulling a large amount of money out of equities [and] a qualitatively different nature of the sell-off in December is that it was quite uniform across equity sectors and styles”, the bank’s Ajay Rajadhyaksha wrote, before noting that last month was “in contrast to the initial leg in October, which was mainly a sector rotation out of cyclical stocks.”
Well, in a new note out Thursday, the bank’s Joseph Abate looks at this from the perspective of money market funds and comes to the same conclusion.
“Balances in retail prime and government-only money funds have increased by 12.7% and 7.2% respectively since August”, he writes, adding that this is “consistent with the observations recently made by our Equity Strategy Team.” By that, he means the observations highlighted in the linked post above.
“The December sell-off has all the hallmarks of a ‘retail flush’ – retail investors suddenly pulling a large amount of money out of equities”, Abate goes on to reiterate.
If you’re wondering whether this is simply a function of more attractive yields, the answer is “no” – or at least “probably not.” Here’s Abate one more time:
Of course, retail money fund balances have been rising all year as the spread between money fund yields and bank deposits has widened. The average 7d yield on a retail prime fund is 2.16% (net of fees), compared with 0.61% on a 12m CD (<$100,000). But the recent increase in retail prime fund balances seems to be deeper than simply a yield differential with bank deposits. Approximately 60% of last year’s increase in retail prime fund balances has occurred since August. More significantly, as equity market volatility surged in December, retail prime fund inflows accelerated; roughly one-quarter of the $115bn that flowed into all retail money funds in 2018 came in during December.
There are a few more interesting insights in Abate’s note which I’ll get to at some point (and there’s a post idea for some other blogger somewhere – you’re welcome) but for the time being, what we wanted to do was draw an amusing parallel as follows.
It’s entirely possible that Thursday’s “retail flush” (i.e., investors punishing the space for underwhelming holiday numbers and forecasts) is a kind of second derivative of December’s “retail flush” (i.e., investors dumping stocks en masse amid acute uncertainty and rampant fearmongering by everyone from the press to the President).
This is the vaunted “wealth effect” – only in reverse. And now it’s feeding on itself in a self-fulfilling loop.