Stocks fell sharply Thursday after many big retailers reported disappointing sales for April and the trade deficit widened, suggesting softer economic growth. After shrugging off the hawkish implications of the Federal Reserve's statement yesterday, Friday's reports on April retail sales and producer prices could give investors pause, says Action Economics. And some pros say the market is overbought and due for a pullback.
The Dow Jones industrial average fell 147.74 points, or 1.11%, to 13,215.13 -- after closing at a new record Wednesday of 13,362.87. The broader S&P 500 index was down 21.11 points, or 1.4%, to 1,491.47. The tech-heavy Nasdaq Composite index lost 42.6 points, or 1.65%, to 2,533.74.
"There are a number of things that can test the strength of this rally," says Jeff Kleintop, chief market strategist at LPL Financial Services in Boston. A big one is how much consumer spending is being hurt by high energy prices and the slowing housing market.
Many retailers reported soft sales for April. Both Wal-Mart (WMT) (-3.5%) and Target (TGT) (-6.1%) posted sales drops in April, with some blame cast at the chilly weather, early Easter holiday, and the pet food recall, reports Action Economics. Gap's (GPS) same-store sales plunged 16%. Analysts had been expecting April sales to be weak mainly because the early Easter holiday had pushed more sales into March.
Kleintop notes that Wal-Mart will be reporting quarterly earnings on May 15, and Target will be on May 23. Other things he's watching are the upcoming inflation reports, the forecast for the hurricane season -- which affects gasoline prices, and the behind-the-scenes chatter about Congress' protectionism regarding trade with China. "It's hard to complain after the run we've had," he quips. "It's time we had a bit of a pause."
Friday will be a busy day of economic data. April retail sales is expected to rise 0.4%, while the ex-auto aggregate also increases 0.4%. Gasoline prices should provide another big 3%-4% price boost to gas station sales -- boosting the retail sales headline by as much as 0.4%, says Action Economics. This report is key for second-quarter consumption and economic growth.
The April overall-PPI is expected to increase 0.5%, while the core index rises 0.2%. All eyes will be on the core print, given lingering inflation concerns at the Fed despite the more dovish core prints in March, says Action Economics. The report will help guide the forecast for the CPI report next week.
And March business inventories is expected to rise 0.3%, while sales increase 1.3%.
In economic news Thursday, the U.S. trade deficit widened sharply to .9 billion in March, from a revised .9 billion in February. Exports rebounded 1.8%, while imports surged 4.5%. Excluding petroleum, imports were up 2.4%. The greater than expected deficit should keep downward pressure on the dollar and Treasury yields as it suggests a steep downward revision to first-quarter GDP, says Action Economics.
U.S. import prices rose 1.3% in April after a revised 1.5% increase in March. Excluding petroleum, prices were up 0.2%. Oil prices were up 6.5%, while industrial supply prices surged 3.7% and food prices climbed 1.4%. Export prices rose 0.3% after a revised 0.6% increase in March. "The data are hotter than expected and will certainly keep the Fed's inflation guard up," says Action Economics.
