Three weeks ago I wrote that retail sales were showing real signs of weakness. Now we are seeing the results in the retail stocks and the news is even worse than I expected.
Last Wednesday, shares in Macy’s (M)—the largest department store in the U.S. and an iconic American brand—plunged 15%. The next day, department store Kohl’s (KSS) fell 9% and on Friday, high-end retailer Nordstrom (JWN) joined the bloodbath, dropping 13%. This massive selloff—which the media is calling the “Retail Wreck”—was due to terrible first-quarter results.
This is the latest bad news in what’s been an extremely ugly earnings season. Companies in the S&P 500 are on track to record a 7.1% decline in earnings. That will mark the fourth straight quarter that earnings have fallen. And that hasn’t happened since the 2008-2009 financial crisis.
Macy’s reported a 5.6% drop in its same-store sales last week. Macy’s sales decline last quarter was its biggest since 2009. Kohl’s first quarter same-store sales fell 3.9%, its biggest decline since 2009. Nordstrom did a little better, reporting “only” a 1.7% decline in same-store sales.
Yes these three are bricks-and-mortar retailers but do not be fooled; all three are also big online retailers so this is not a question of one sector growing at the expense of another. These are bad numbers, plain and simple, because the consumer is tapped out.
When I was a stock broker in a previous lifetime, we used to say that many an investor had gone broke underestimating the strength of the American consumer. The shoe is now, finally, on the other foot. Investors are going broke believing that the U.S. consumer can continue to spend.
Today we got the FOMC minutes from their last meeting two weeks ago. The minutes claim to show that the Fed governors had a serious discussion about maybe raising rates at the upcoming June meeting. At least, that’s the way the market seemed to interpret them as the fed futures contract quickly priced in a 36% chance of a hike next meeting from less than 5% last week.
I think there is no way they raise rates in June. The retail numbers are emphatic. The economy is failing before our very eyes. Don’t listen to the Fed; look at what’s happening in the real world.
Unfortunately, most of the information we get on the U.S, economy comes from the federal government. As I have said previously, this data is so messaged by higher mathematics that it has become meaningless or misleading.
Fortunately, the private sector also produces data that does not serve a political agenda. One such source is the monthly Cass Freight Index produced by Cass Information Systems from data provided by America’s 400 largest truck and rail shippers. The most recent monthly report for April was published last Friday. Traditionally, trucking and railroad activity has been a key indicator of the health and direction of the U.S. economy.
You are about to see a chart that is undeniable evidence that we have entered a major economic slowdown.
This is not a seasonally adjusted index so you can clearly see the seasonal variations in shipping activity. The red line shows the level of activity for the first four months of this year. You can also clearly see that the trend is sharply down since 2014. In fact, the first four months of this year are the worst since April of 2010. The reality is that we have now seen the Cass Index decline on a year-over-year basis for 14 consecutive months.
In 2007-2008, there was a similar decline in this Index but the Federal Reserve and other “experts” assured us that there was not going to be a recession. Then we immediately proceeded to plunge into the worst economic downturn since the Great Depression of the 1930s.
Just because stock prices are artificially high right now does not mean that the U.S. economy is in good shape. In fact, there was a stock rally at this exact time of the year in 2008, even though the underlying economic fundamentals were rapidly deteriorating. We all remember what happened later that year.
As I reported earlier today, the monthly ISM Manufacturing New Orders Index is flashing recession. The March data was released on May 2 and it shows that New Orders have now declined for 17 straight months on a year-over-year basis, with March dropping 4.2% from a year ago.
Real Gross Private Domestic Investment (RGPDI) is another excellent leading indicator of recession. If businesses aren’t investing, recessions almost always follow. The latest update of this economic indicator became available last Thursday. Unfortunately, RGPDI is only reported quarterly.
As illustrated below, RGPDI turned down during the third quarter of last year. It fell a little further during the fourth quarter of last year and fell again in the first quarter of this year (the latest number), which again reinforces my belief that a recession is either underway or will soon begin.
You can see the pattern in the chart as clear as day. The gray vertical lines are recessions and each one of them occurs during a downturn in business investment.
I may sound like a broken record when it comes to this recession issue. But believe me, this is important. This ridiculously over-priced equity market will be punished beyond recognition by an economic recession, presenting investors with one of the best short opportunities in many years. And the onslaught of a recession will also complete the destruction of what credibility the Fed has left, opening the way for the mother of all gold rallies.