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Market Recap – Consumer Stocks Hit Hard

Market Digest – Week Ending 5/13

Stocks retreated modestly for the week, pushing the S&P 500 index back to flat for the year and driving international stocks back into negative territory. Consumer stocks were hit especially hard after Macy’s, Kohl’s, Nordstrom and Disney reported disappointing earnings. Online loan marketplace Lending Club shares lost 50% for the week after it reported a group of loans to be sold to an institutional buyer did not meet the required characteristics and also improper disclosure in a personal investment by the CEO, who resigned.

Weekly Returns:

S&P 500: 2,047 (-0.5%)
FTSE All-World ex-US: (-1.0%)
US 10 Year Treasury Yield: 1.70% (-0.08%)
Gold: $1,272 (-1.3%)
USD/EUR: $1.131 (-0.8%)

Major Events:

• Monday – JAB holding company agreed to acquire Krispy Kreme doughnuts for $1.3 billion.
• Monday – Lending Club announced it had found problems with some of its lending practices and executive lack of disclosure on a personal investment. CEO Renaud Leplanche resigned and shares fell 35%.
• Tuesday – Allergan announced it will streamline its executive team and buy back $10 billion in stock following a disappointing earnings release.
• Tuesday – A federal judge blocked the Staples and Office Depot merger, citing antitrust concerns.
• Wednesday – Retail stocks slumped after weak earnings results from Macys and Disney.
• Thursday – Apple invested $1 billion in Chinese ride hailing service Didi.
• Friday – Honda Motor swung to a quarterly loss on recall related costs. The company will recall 21 million Takada air bags.

Our take:

It was a really bad week for department store stocks. Nordstrom, Macy’s and Kohl’s were down 19%, 17% and 14%, respectively. Each reported earnings that missed estimates. This is in sharp contrast to Amazon, which a few weeks ago reported another period of massive revenue growth. It is pretty simple – more people are buying more things online as opposed to shopping in physical stores.

Specialty stores are also having a tough time. Teen retailer Aeropostale recently declared bankruptcy and announced major store closings, highlighting the difficulties of mall based chains. Sports Authority followed a similar path. Not all stores are doing poorly. Major players like H&M, Zara and Uniqlo are finding success, but the trend is undeniable.

A major implication of the rise of online shopping is a loss of jobs. When Netflix destroyed Blockbuster, it also eliminated all the jobs needed to run the video stores. Likewise, every time a store closes because of Amazon, jobs disappear with it. The internet is allowing automation of jobs in almost every industry. So far, unemployment remains low, though this is somewhat misleading because the official number has been held down by shrinking participation in the labor market. Less people are working or actively looking for work. Much is demographics and some is younger people who have given up.

If the trends persist, loss of jobs may be the biggest issue our next President faces.

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