Stealth Corrections Under The Surface

Stocks fell at the open (Dow -130 pts; SPX -.4%). The S&P 500 is now 2.2% below its all-time high. CNBC Contributor and money manager Josh Brown believes we’re seeing a “stealth correction under the surface.” That is, moves at the overall index level are minor, but individual stocks and industry groups are experiencing more significant corrections. He says this is normal. About 15% of stocks in the S&P 500 are more than 20% down from 52-week highs. Pharmaceuticals, chemicals & metals, airlines and industrials are currently correcting after huge moves in early in the year.

Today’s retail sales report was mixed and murky, failing to give investors a clear view of the near-term outlook for the economy. According to the US Census Bureau, nationwide retail sales grew faster than expected in August, but unfortunately July sales were revised significantly lower than initially reported. Taking the two months together, I suppose the data were slightly better than expected. The recent Covid wave stunted restaurant and travel spending. Ongoing supply chain disruptions likely held back spending on other categories. Despite that, it’s clear that both online and brick-and-mortar stores bounced back from a weak July. Consumer incomes likely took a hit from expiring unemployment benefits, but some of that is offset by newly expanded child tax credits. Much like last week’s jobs report, traders were looking to this report for a clear buy or sell signal. They didn’t get it.

On the other hand, China’s economy is clearly slowing as a direct result of a Covid-19 Delta variant outbreak that began in Nanjing. Despite reports that China has fully vaccinated 70% of its population and data available to Johns Hopkins University and ourworldindata.org show only about 50 new Covid cases per day—yes, 50 out of 1.4 billion people—the government has again imposed some regional lockdowns. These restrictions caused August retail sales to decelerate to 2.5% year-over-year growth vs. economists’ consensus expectation for 7%. Restaurant sales fell 4.5%. Industrial production has also slowed. At the  same  time, the communist government’s unexpected move to more closely control corporations is riling capital markets. The initiative started with large tech firms; the Alibaba empire has been ordered to break up. Then the government moved to crush private education companies. Most recently, regulators announced tighter restrictions on casino operators and video game developers; government minders will be appointed to “supervise” these companies. The combination of these two events has essentially made China a no-fly zone for global investors.