A Declining Trend in Retail Sales

Equity markets declined today while Treasuries were bid. The S&P500 declined by 21.85 points, or -1.17%, to settle at 1846.35. The 10-year Treasury note currently yields 2.65%. Out this morning was the most important economic release of the week: Retail Sales. While U.S. equity markets initially rose early in the day based on slightly better-than-consensus economic data and yesterday’s intraday rally, they were consistently sold off throughout the day with a peak to trough decline of 1.74%.

Equities were likely a little overbought coming into the day and the Retail Sales report is unlikely to be the sole factor of the sell-off, but rather just the necessary catalyst. Below is a chart of the year-over-year change in Retail Sales:


Of the 254 data points on the chart above, only 22 are lower than the current 1.481% 12-month change (subject to revision); 18 of which came during the period between March 2008 and November 2009. It’s unfortunate that this data doesn’t go back any further for a more in-depth economic cycle analysis. Of note in this data is that the average year-over-year change for Retail Sales is 4.58%. Additionally, the chart is clearly trending lower from a recent peak in July 2011.

As it has in the past, markets tend to dislocate from economic data and it is yet to be seen whether or not an economic plateauing will translate into our thesis of an equity market plateauing. I would expect U.S. equity markets to trade flat-to-lower until Tuesday/Wednesday of next week, when they might receive the necessary support they need from several economic releases and the FOMC announcement. That is not to say they will trade higher at that point, rather, just that the short-term trend lower is in effect until that point.

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