By Nigam Arora
Sophisticated investors closely follow economic data. But I’ve noticed that some lesser-experienced investors don’t do the same. They should. Because two important pieces of economic data were just released.
Please click here to see a chart of retail sales. Please note from the chart that as the stock market continues to go higher, retail sales are declining after a prolonged run. This is especially troubling because the economy is near full employment. Typically, as employment gets stronger, retail sales climb. Could this be an early warning signal?
The American economy is 70% based on consumer spending. For this reason, retail sales are very important.
Retail sales, excluding autos, came in at -0.2% vs. +0.2% consensus month-over-month. We exclude autos from our models because they’re volatile and create noise that clouds the analysis. To see how The Arora Report filters out the noise, please click here .
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
The core Consumer Price Index (CPI) came at 0.1% vs. 0.2% consensus. In our models, we do not use headline CPI and exclude food and energy because they, too, are volatile.
Weak inflation sometimes takes pricing power away from companies. This often leads to less profitability. Prime examples here are AT&T /zigman2/quotes/203165245/composite T -0.95% and Verizon /zigman2/quotes/204980236/composite VZ -0.19% , where wireless bills are falling. In spite of their large dividends, stocks of AT&T and Verizon have not done well in the bull market this year.
Bonds and gold roar, but the dollar weakens
After dovish testimony by the Federal Reserve’s Janet Yellen, weak economic data released now makes it less likely that interest rates will rise soon. The Fed is likely to focus on unwinding its $4.5 trillion balance sheet.
Any currency that pays a lower interest rate gets weaker. The dollar fell on the news. An ETF of interest is /zigman2/quotes/209727862/composite UUP +0.31% .
Gold is priced in dollars. As the dollar fell, gold roared. ETFs of interest are gold ETF /zigman2/quotes/200593176/composite GLD -0.25% , silver ETF /zigman2/quotes/205744453/composite SLV +1.12% and gold-mining ETF /zigman2/quotes/206399889/composite GDX -1.40% . Day traders are having a heyday with leveraged gold-miner ETFs /zigman2/quotes/204236046/composite DUST +3.26% and /zigman2/quotes/208908392/composite NUGT -2.80% .
Interest rates fell on weak economic data. Bonds go up when interest rates fall. ETFs of interest are /zigman2/quotes/206026314/composite TLT +0.62% , /zigman2/quotes/200202000/composite TBT -1.19% and /zigman2/quotes/209898032/composite TBF -0.65% .