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Thursday, March 14, 2013

Unexpected Strength In Retail Sales Hasn't Changed The Market's Message of Concern

Unexpected strength in retail sales in February had the cheerleaders singing songs of praise and joy today. The message of the market which supercedes anything the cheerleaders say remains one of concern and disconnect between perception and reality.

Perception says consumer spending, a linchpin of GDP growth, is beginning to accelerate. If this were the case, retail stocks would be leading the stock market rally. Retail stocks, however, have been under performing the stock market since November 2011 (chart). This is a negative divergence.

Chart:  Retail Stocks to S&P 500 Ratio

Unconfirmed rallies, while dangerous, can last for weeks/months/years.  The longer the disconnect lasts, the more severe the adjustment will be when reality finally breaks the back of perception.  In other words, but the power of the cheerleaders, but never lose sight of the message of the market.

Headline: U.S. retail sales climb 1.1% in February

Retail sales advanced 1.1% in February to mark the biggest gain in five months, the Commerce Department said Wednesday. Economists polled by MarketWatch expected retail sales to jump 0.7%.

The figures suggest that consumer spending — the linchpin of the economy — is holding steady despite a spike in gasoline prices and higher payroll taxes in 2013. Many economists worried that spending would sag early in the year and act as a drag on U.S. growth


Headline: The wealth effect might be shrinking

The Dow keeps hitting all-time highs and home prices are rising.

But many Americans do not feel any richer. That could be bad news for the economy.

"Consumers may be skeptical about their wealth," said Mark Zandi, chief economist at Moody's Analytics, in a research note.

In the past, consumers have spent more when stocks and the value of their homes were climbing -- even if they don't plan to cash out on those investments any time soon.



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