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Sept. 1, 2019, 10:15 a.m. EDT

These charts warn that there is something wrong with the American consumer

Consumer discretionary and retail stocks are underperforming at an alarming rate, defying many calls about consumers’ strength

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By Tomi Kilgore, MarketWatch


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There appears to be something wrong with the American consumer.

While recent stock-market volatility, uncertainty over the U.S.-China trade war and the yield-curve inversion have fueled worries of an impending recession, many on Wall Street, in the White House and in the Federal Reserve have remained fairly upbeat on the economy.

Consumer spending makes up about two-thirds of the economy , so many see low unemployment and recent strong retail-sales data as good reasons to believe the U.S. economy can withstand a little stock market volatility and U.S.-China trade war drama.

Bank of America Corp. /zigman2/quotes/200894270/composite BAC +0.30%  Chief Executive Brian Moynihan said the fact that the U.S. consumer continues to spend is the one simple reason he doesn’t believe a recession looms as many fear. And Deutsche Bank economist Justin Weidner wrote in a note to clients Friday that his outlook for consumer spending remains “relatively upbeat” the rest of the year, after a likely “robust” July.

Even the Federal Reserve said in its most recent policy statement , as they cut interest rates, that “household spending has picked up” from earlier in the year.

But a closer look at multiple charts of stocks that track consumer behavior, in relation to the performance of the broader stock market and consumer confidence data, warn that the consumer has actually been fading for a while. And that could start acting as a drag on the broader market, and eventually the economy.

Stocks suggest consumers are spending on needs more than wants

“The consumer discretionary sector is highly sensitive to what the overall stock market is doing, and to worries about economic growth and contraction,” Tom McClellan, publisher of the McClellan Market Report, wrote in a recent newsletter to clients.

One way to see this relationship in real time is through a relative strength chart comparing consumer discretionary stocks, by way of the SPDR Consumer Discretionary Select Sector exchange-traded fund /zigman2/quotes/200844504/composite XLY -0.20%  (XLY), to the consumer staples sector, as tracked by the SPDR Consumer Staples Select Sector ETF /zigman2/quotes/200697959/composite XLP +0.20%  (XLP), then compared that chart to the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39%  .


FactSet, MarketWatch

“Generally speaking, the overall stock market tends to do best when XLY is winning the relative strength game,” McClellan wrote.

Outside of a big bounce in the first quarter, XLY-XLP relative-strength chart has been trending lower for more than a year, with the recent July recovery high coming in well below the April rally peak, and as last week's low was well below the June low.

In contrast, despite the August pullback, the S&P 500 continues to trend higher, as the August high was well above the May high, and this week’s low was well above the June low.

The problem is, when the XLY-XLP and the S&P 500 have disagreed in the past, it was the XLY-XLP that proved prescient.

Retail stocks are fading, and it’s not all Amazon’s fault

At first glance, last week appeared to be a great week for retailers, as shares of heavyweights Target Corp. /zigman2/quotes/207799045/composite TGT -0.37%  and Home Depot Inc. /zigman2/quotes/208081807/composite HD +0.49%  shot up to record highs after better-than-expected earnings reports.

But a relative strength chart comparing the SPDR S&P Retail ETF /zigman2/quotes/206947004/composite XRT -1.43%  (XRT) and the S&P 500 shows that last week’s blip up was quickly brushed aside.


FactSet, MarketWatch

And while it’s easy to blame Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -1.68% for retailers’ troubles, Amazon’s stock performance relative to the S&P 500 peaked about the same time the XRT did, suggesting the retail sector’s troubles may run deeper than just competition.

/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 30.35
+0.09 +0.30%
Volume: 48.88M
Oct. 18, 2019 6:30p
P/E Ratio
11.24
Dividend Yield
2.37%
Market Cap
$282.51 billion
Rev. per Employee
$543,289
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/zigman2/quotes/200844504/composite
US : U.S.: NYSE Arca
$ 122.17
-0.24 -0.20%
Volume: 2.06M
Oct. 18, 2019 8:00p
loading...
/zigman2/quotes/200697959/composite
US : U.S.: NYSE Arca
$ 60.74
+0.12 +0.20%
Volume: 9.30M
Oct. 18, 2019 8:00p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
loading...
/zigman2/quotes/207799045/composite
US : U.S.: NYSE
$ 112.81
-0.42 -0.37%
Volume: 3.89M
Oct. 18, 2019 6:30p
P/E Ratio
18.67
Dividend Yield
2.34%
Market Cap
$57.64 billion
Rev. per Employee
$209,322
loading...
/zigman2/quotes/208081807/composite
US : U.S.: NYSE
$ 237.93
+1.16 +0.49%
Volume: 3.66M
Oct. 18, 2019 6:30p
P/E Ratio
23.70
Dividend Yield
2.29%
Market Cap
$260.57 billion
Rev. per Employee
$261,993
loading...
/zigman2/quotes/206947004/composite
US : U.S.: NYSE Arca
$ 42.71
-0.62 -1.43%
Volume: 5.44M
Oct. 18, 2019 8:00p
loading...
/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,757.51
-29.97 -1.68%
Volume: 3.37M
Oct. 18, 2019 4:00p
P/E Ratio
72.92
Dividend Yield
N/A
Market Cap
$869.36 billion
Rev. per Employee
$359,671
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