After more than five years of reckless stimulus, endless rate manipulation and generally artificial life support the bull market faces a new challenge from the most unlikely place. It's not the Fed but the consumer that could derail the recovery, at least according to a what we heard from a couple of retail execs on Tuesday.
In a conference call last night. The Container Store (TCS) CEO Kip Tindell said America is facing a "retail funk." Not funky, with connotations of heavy bass and jewelry purchases, but funk as in gloominess and general lassitude. Tindell took the unprecedented step of retroactively un-blaming the weather for weakness in The Container Stores first quarter results. "It's more than just weather" said Tindell, "With so many of our fellow retailers we're experiencing a retail funk."
Tindell's remarks echoed comments earlier in the day from Walmart (WMT) U.S. head Bill Simon who said the job recovery wasn't leading to an increase in spending by Walmart customers. Simon says things aren't getting worse for middle class Americans as far as he can tell. He's just not seeing improvements. Lacking Tindell's sense of rhythm Simon suggested that perhaps consumers from the middle class down are splurging on events like the 4th of July but pulling back on day to day spending. Simon says this spending behavior is "not the best thing in the world for retailers."
It certainly isn't great for retail stocks. The SPDR Consumer Discretionary ETF (XLY) basket of stocks has been flat-lining all year. For individual specialty chains like The Container Store things have been much worse. TCS shares are down more than 15% this morning and making fresh all-time lows.
While the consumer accounts for 70% of U.S. GDP it may not be time to panic just yet. First we have to consider the sources. Walmart has been plagued by comp stores weakness and The Container Store has badly missed estimates twice in only three quarters as a public company.
The best interpretation of these remarks is that they are sour grapes. Based on Gallup data consumers on the low end are spending at a growing rate. Even Simon concedes that high-end spending for cars and housing is strong. The harshest interpretation is that finally, at long last, the consumer has run out of steam. Betting against American shoppers is traditionally a horrible strategy but it would be equally foolish to ignore what we're hearing. Shoppers are lifeblood of the economy and the market rally. The country needs shoppers to drop the funk and get their groove back or else the market could be in serious trouble.
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