Low retail sales, rising consumer confidence calm volatile stocks

an electronic trading board at the phillipine stock market

Weak retail sales contrasted with a rising consumer confidence report to narrow trading and reduce stock market volatility on Friday. Flickr photo.

Retail sales dropped in May, and the stock market dropped in step with data delivered by the Commerce Department retail sales report. Stock market volatility has become the new normal. The stock market rose at the end of the day Thursday before reversing direction early Friday when the May retail sales report was released. A schizophrenic market then seesawed throughout the day as conflicted investors weighed the negative retail sales report with an unexpectedly positive analysis of consumer confidence.

Commerce Department retail sales

Retail sales derailed the optimism of a late stock market rally on Thursday. The New York Times reports that Wall Street indexes fell Friday morning after the Commerce Department reported that retail sales decreased 1.2 percent last month, the largest drop since last fall. Five of 13 retail sales figure categories in the report decreased with the largest drop in building materials at 9.3 percent. Excluding sales to commercial fleets (overall auto sales increased in May), retail auto sales were down 1.7 percent.

Stock market volatility week

Despite all the recent stock market volatility, all three major indexes closed higher for the week. Stock prices dove in the last hour Monday (jobless report), rebounded Tuesday (reassuring words from the Federal Reserve), dove again Wednesday (political pressure on BP dividends) and bounced back Thursday (overseas economic reports). The Times reports that Friday’s session, its volatility tempered by the good cop/bad cop consumer confidence and retail sales reports, made the difference for the somewhat happy ending.

Consumer confidence report beats forecast

A few hours after the May retail sales report sent investors out of stocks and into bonds, the Reuters/University of Michigan consumer sentiment index for early June came in higher than expected at 75.5, up from 73.6 at the end of May and better than the 74.5 economists had been expecting. Forbes reports that the disparity between the retail sales and consumer confidence reports signifies that many Americans still feel that their personal finances are under stress while they see the overall economy to be on the mend and hope for better days ahead.

Retail sales silver lining

A deeper analysis of the retail sales report may explain why consumers on Main Street feel better than traders on Wall Street. Frank Ahrens of the Washington Post points out that even though retail sales dropped 1.2 percent from April to May, compared with May 2009 retail sales were actually up 7 percent. Ahrens goes further to say that when excluding negative numbers from bigger pieces of the pie taken by auto sales, building materials and gasoline (down 3.3 percent) overall retail sales actually rose 0.1 percent in May.

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