As the Markets Rally, Retail Data Suggests Continued Economic Weakness

COMMENTARY | Optimism surrounding the coordinated foreign currency swap line arranged between the U.S. Federal Reserve and other global central banks on November 30, 2011 reduced concerns that Europe and its banks were on the verge of imploding. The ensuing stock market rally of greater than 4 percent appears to have temporarily eased the fears of market prognosticators and caused shorts to rush to cover. Following Wednesday’s dramatic rise, the markets traded within a relatively tight range to begin December as investors continued to assimilate details of the policy intervention in the face of important economic releases.

The most recent Fed intervention, however, is not a silver bullet capable of preventing a virtually inevitable European recession and the ripples that will flow through the global economy. Economic data has generally been mixed, with ShopperTrak reporting that Black Friday sales increased 6.6 percent over last year to more that $11 billion in retail sales. Although ShopperTrak reported lower foot traffic on Saturday and Sunday, the National Retail Federation estimates weekend sales at over $52 billion, a 16 percent increase over last year, and projects 2.8 percent holiday sales growth this year.

These rosy projections were challenged by Thursday’s retail sales data which continues to reflect a bifurcated economic environment. Luxury department stores Macy’s and Nordstrom reported strong results, while discounters such as Kohl’s and Target struggled to attract customers despite opening Thanksgiving night in many markets. Limited Brands experienced 7 percent same-store sales growth, beating analysts projections. As the luxury retailers continue to experience success in boosting sales and attracting customers, the conservative approach pursued by customers of discounters reflects the challenges that have prevented the economy from gaining enough momentum to break free from the devastation of the housing collapse and financial crisis.

As the economy continues to bump along the bottom, the unemployment rate will remain elevated and consumer spending among the less affluent will be constricted by slow to non-existent income growth. Despite recent rhetoric suggesting a potential compromise by Congress on an extension of unemployment benefits and the payroll tax cut, new catalysts for stimulating a moribund economy are relatively limited. With just a few more weeks before the politicians switch permanently into campaign mode, the prospects for a market stabilizing economic catalyst and stimulative policy actions remains limited. Expect market volatility to return as the sugar high of Fed-induced liquidity and promising earnings and economic releases subsides.

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