Wall Street Retreats as Consumer Sentiment Weakens and Inflation Expectations Rise

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Wall Street traders sent stocks down from all time highs “after a gauge of consumer sentiment unexpectedly fell and inflation expectations rose.” The S&P 500 “edged lower after earlier gaining on data retail sales that had tempered some concerns about a retrenchment in consumer spending.” The Nasdaq 100 underperformed major benchmarks, while the Dow Jones Industrial Average hovered near a record.

Short dated bonds slightly outperformed, with money markets “still projecting at least two quarter point Federal Reserve rate cuts before the year is over.” The dollar declined.

Consumer Sentiment and Inflation Outlook

The preliminary August sentiment index “fell to 58.6 from 61.7 a month earlier,” according to the University of Michigan. Consumers now expect prices to rise at an annual rate of “4.9% over the next year, wiping out the prior month’s improvement,” with a 3.9% rise expected over the next five to ten years.

“Weaker outlook on the economy along with higher inflation,” said Andrew Brenner at NatAlliance Securities. “We still see the Fed cutting 25 basis point in September.”

Retail Sales Lift Spending Outlook

US retail sales in July rose in a “broad based advance, boosted by car sales and major online promotions” in a sign that consumers increased spending in recent months. Bret Kenwell at eToro noted that while July’s retail sales figures weren’t a blowout, “control group sales — which are used in the GDP calculation — topped economists’ expectations, while June’s already strong report was revised even higher.”

“In a world where there are plenty of macro related worries tied to inflation and employment, consumers are still out there spending,” Kenwell said. “That’s true with today’s report, and is also the tone we’re hearing on corporate earnings calls as well.”

Corporate Profits and Market Resilience

Chris Zaccarelli at Northlight Asset Management remarked: “The market is expensive, inflation has been increasing and unemployment has been rising, and yet consumers are still spending, the economy is still growing and the market is still rising.” While conditions aren’t perfect, he added they are “good enough” for a slow grind higher – with the occasional pullback – on a path to a higher stock market by year end.

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Investor Positioning Ahead of Fed Signals

According to Bank of America Corp. strategists led by Michael Hartnett, US stocks are set to decline in the event of dovish signals from the Fed at the Jackson Hole economic symposium as investors ‘buy rumor, sell fact.’ Data from EPFR Global showed investors poured about $21 billion into US equity funds in the week through Aug. 13, after redeeming nearly $28 billion the week prior.

Fed Bank of Chicago President Austan Goolsbee told CNBC he wanted to see at least one more inflation report to confirm that “persistent price pressures aren’t picking up.”

Corporate Highlights

Intel Corp. – The Trump administration is considering using US Chips Act funds to take a stake in the struggling chipmaker.
Applied Materials Inc. – Issued a disappointing sales and profit forecast, raising concerns over demand amid the US China trade dispute.
UnitedHealth Group Inc. – Shares jumped after large fund inflows. Berkshire Hathaway bought 5 million shares, while Appaloosa Management increased holdings by 2.3 million shares.
Lindt & Spruengli AG – May shift Easter bunny production to the US to avoid import tariffs.
Pandora A/S – Considering price increases in the US due to higher tariffs.
AstraZeneca Plc – Released an at home flu vaccine nasal spray in the US during a contentious period for vaccine access.