Blowing Off The Froth

Stocks resumed their developing downtrend last week with the S&P 500 (SPY) falling a bit over 3.5%. That wasn’t bad compared to emerging market equities, down nearly 5% on the week or the darling Nasdaq (QQQ) stocks, down over 4%. Bonds finally found a bid as the economic data was nearly uniformly miserable, culminating with a less than expected retail sales report that merely confirmed what Macy’s (M), Nordstrom (JWN), Penney’s (JCP) and so many other retailers have been reporting, namely that the US consumer doesn’t seem to be in a shopping mood. That was also confirmed by the release of inventory figures that showed levels relative to sales that are higher now than at the beginning of the last recession.

That the consumer appears to be slowing down should not in any way be a surprise. We’ve been watching a steady decline on the investment side of the economy for over a year now, something commonly dismissed as “just energy”, but which is looking more and more like the normal sequence of events leading to a growth slowdown or recession. It is always investment that leads us into and out of recession; consumption is the laggard. The slowdown that knocked Macy’s, Nordstrom and Penney down over 15% on the week is merely confirmation of what the data has been telling us for over a year – the US economy is slowing down. Will it turn into recession? I don’t know and neither does anyone else but with earnings falling again this quarter it might not matter that much for stock investors.

It isn’t just publicly traded stocks that are starting to get marked down either. Last week brought reports that Fidelity had marked down a lengthy list of private company investments including a Snapchat haircut of a mere 25%. Blackrock (BLK) recently wrote down their investment in Dropbox, another press darling, and Square announced plans to go public at a valuation well south of their last private round. There are also early signs that the London property market may be finally cooling – although any drop so far is modest at best – and I’ve heard anecdotal evidence of some slowing in NYC and Miami. In credit markets, banks are having trouble unloading some of the M&A loans on their books and the junk bond market is in a persistent downtrend.