Thursday, May 6, 2010

Stock Market Decline Follows Sobering Retail Reports

The main takeaway from today’s 3 percent stock market decline is that big-money investors had been expecting too much from consumers. A large increase in retail sales in March was followed by indications of a slight year-over-year decline in April, and the stock market notched down as some of the early reports trickled in.

The economic recovery cannot be led by consumers, as household income will not rise fast enough this year to make up for consumers’ declining access to credit. Expectations of a consumer-led recovery were apparently the reason why the stock market had edged up to unsustainable levels this year. The thought of a decline from the already low levels of a year ago took the wind out of those sails.

The U.S. economic recovery will probably have to be driven by exports, but improvements in exports will not come quickly if the European economy is as shaky as it looked today — another factor that could have led to expectations of a slower recovery.

The abrupt 5 percent decline in the middle of the day, which quickly reversed, appeared to be mostly a technical event, but the fact that the market fell more than 3 percent in just a few minutes before support arrived shows that investors lack confidence in the stock market at its current levels. There were indications too that some institutional investors were selling stocks to buy bonds this afternoon. That is a sign that those investors do not expect the stock market to improve from its current level during the next three months.