Dollars and Sense: The week of the consumer

A jumpy market. We saw a number of 100-point swings this week, sometimes in a single day. Last Monday was a good example. Conflict in Ukraine and slowing growth in China sent the markets down more than 100 points in the morning. An index of Chinese manufacturing showed contraction in April—the fourth month in a row. Then the Institute for Supply Management’s non-manufacturing index for March came out, showing the service sector here in the United States grew at its fastest rate in eight months. On that news, the Dow and S&P 500 erased most of the morning’s losses and ended up at near record highs.

Down and up. Then stocks declined sharply on Tuesday, in part because American International Group (AIG) missed its earnings estimate. Twitter also fell as insiders got their first opportunity to sell since the company’s initial public offering. All but 3 of the 30 stocks that make up the Dow index fell into the red on Tuesday. The turbulence continued on Wednesday. At one point during the day, the Dow rose more than 100 points, but it fell again when Federal Reserve Chairwoman Janet Yellen suggested that investors needed to rein in their dependence on low interest rates.

Global concerns. A couple of years ago, everyone was focused on Europe. Then the crisis there abated and domestic concerns like the unemployment rate and Fed policy seemed to dominate financial news. But are global concerns becoming the primary newsmakers again? The short answer is: Yes, at least for now. First quarter earnings reports here in the United States were actually quite good, but the markets just didn’t seem to care much. Or, said more accurately, both the Dow and the S&P 500 are near record highs, and the good earnings reports confirmed these strong valuations. But the earnings reports were not good enough to push the markets any higher. Traders are looking everywhere to get a sense of where the markets will go. So we end up in a cycle of fear about the news from Ukraine and China and elsewhere—such as Venezuela, for example, which is becoming the problem child in South America. That fear drives the markets down until folks say, hey, wait a minute, the market fundamentals here at home are not that bad. Then the markets stabilize and rise again.

Mostly good news. A report released Thursday showed a healthy retail sector. Seven retailers tracked by Thomson Reuters tallied an overall 4.6 percent rise in April same-store sales. More good news came from the Labor Department. Initial jobless claims fell by 26,000 to to 319,000 last week. That was better than expected.

The week ahead. First quarter earnings season is just about over, though we’ll get a few more reports from stragglers and companies with odd year-end dates. We sometimes get surprises in the last days of earnings season, though I don’t think even negative surprises would be enough to dampen the spirits of this quarter. We’ll get a lot of government reports this week. The Commerce Department will release retail sales figures Tuesday. If they confirm the Thompson Reuters survey, we could see movement in the markets. The consumer price index will come out on Thursday. So we might call this week the week of the consumer. Retail sales and everything upstream from retail—wholesalers, manufacturers, transportation, and distribution—still account for 70 percent of the country’s economic activity. So this week will give us some important data about how that vital part of the economy is doing.