Stock Market Rally Begins to Fade

Stocks opened lower this morning under the weight of rising oil prices and interest rates. At the moment, the Dow is down 290 points and the S&P 500 is down 1.1%. After having rallied for two months, we should expect some give-back in the stock market. WTI crude oil edged up to $87/barrel in early trading, but other commodities are weak. Copper continued to fall due to a softening Chinese economy. Gold is now down 4% on the year. The bond market is selling off, allowing yields to move higher. After a hotter than expected inflation report out of the UK, it seems global bond traders are jittery about tighter monetary policy. Here at home, the Fed is scheduled to release minutes of its July policy meeting, and I can’t imagine they’ll be anything but hawkish.

US retail sales held steady last month, proving that the consumer isn’t falling apart. Data from the Census Bureau confirmed spending on autos, gasoline and apparel declined. Prices for merchandise and commodities are at last declining on the back of lower oil prices and discounting by department stores eager to clear out inventory. But setting autos & gas aside, retail sales climbed a better than expected .7% from the prior month.

Target (TGT) reported mixed quarterly results and the stock is down 3% this morning. Total sales growth slowed to 3% and the company was barely profitable. Unfortunately, merchandise retailers repaired supply chains and bulked up on inventory at exactly the same time consumers shifted spending away from apparel, appliances and furniture. Target was caught in the storm and has been aggressively discounting to work off the excess fat. The Wall Street Journal says management has chosen to “rip off the Band-Aid,” but the “pain isn’t quite over yet.” There was some good news. Food & beverage sales shot up 10%, and the beauty category fared well. But the damage done by cost inflation and discounting shows clearly in the operating profit margin, which fell to 1.2% from 9.8% a year ago. Despite this, management predicts the situation will be fixed soon, expecting the profit margin to rise to 6% in the back half of the fiscal year.