How the Stock Market Is Being Supported by Consumption

Despite the trade war and the inverted yield curve, the S&P 500 Index is down 1.8% this month. Its resiliency reflects the US consumer sector’s strength.

Sanmit Amin - Author

Aug. 21 2019, Updated 5:15 p.m. ET


The US stock markets have been relatively resilient this month despite several economic headwinds. The escalation of the trade war, declining economic growth expectations, and the inverted yield curve have all increased the stock market’s volatility.

Despite all that, the broad S&P 500 Index (SPY) is down only 1.8% in August. One factor behind its steadiness is the evident strength in the US consumer sector. The retail sector rebounded in July, which caused markets to rally last week. Consumption makes up two-thirds of the economy, and robust retail sales showed that consumer sentiment remains strong.

On Wednesday, August 21, the S&P 500 futures were up 0.88% after strong earnings growth in the retail sector. Despite all the volatility, the S&P 500 Index is still up a whopping 16.7% for the year.

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Target and Lowe’s solid earnings drove stocks up

Target (TGT) stock was up more than 12% after the retail giant posted quarterly results that beat expectations. Target’s same-store sales grew 3.4% year-over-year, higher than Wall Street’s expectation of 2.9% YoY.

Home improvement company Lowe’s (LOW) also surged 12% after reporting better-than-expected results. Lowe’s US same-store sales were up 3.2% year-over-year, and its earnings rose 10% year-over-year.

These results indicate that the US retail sector is in good shape. However, consumer sentiment might have taken a blow in August after the US-China trade war escalated.

The economy is on firm footing, but the trade war is a headwind

While the US consumer sector remains in decent shape, there are signs that the economy is slowing. The US GDP grew 2.1% in the second quarter, a slowdown from the 3.1% growth it posted in the first quarter.

This slowdown resulted from the deceleration in the export-oriented sectors. The US-China trade war is the most significant headwind to the economy. In our view, unless a trade deal between the two countries can be struck, the economy is set to decelerate even more. For now, strong retail numbers indicate that the US economy is not headed to a recession, at least not immediately.

Meanwhile, investors will be looking for any hints of future rate cuts in the minutes from the Fed’s July meeting. Markets expect a rate cut in September and another one by the end of the year.

Easy monetary policy has been a big boost for the US stock markets this year, as well as for most of this decade. However, after a point, an ultra-easy monetary policy can be hazardous to the economy.


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