Retail stocks shot higher on Wednesday, after upbeat earnings reports suggested consumer spending — the engine of the American economy — is still holding up, even as the global economy struggles.
Two large retailers, Target and Lowe’s, reported second-quarter profits on Wednesday that beat analysts’ expectations, throwing cold water on the view that a global industrial slump was beginning to bleed into the broader American economy.
“A lot of people were thinking, ‘Gosh, is the American consumer going to be slowing down their spending,’” said King Lip, chief strategist at the wealth management firm Baker Avenue. “But the reality is that’s not really the case.”
Stocks of consumer-focused companies led the S&P 500, which finished the day up 0.8 percent. Target jumped 20.4 percent, and the home improvement chain Lowe’s rose 10.4 percent, making them the two best-performing stocks in the S&P 500. Retail stocks dominated that list on Wednesday: Nordstrom rose 5.5 percent, Kohl’s jumped 4.9 percent and Gap rose 4 percent.
The retail rally pushed stocks to their fourth gain of the last five trading sessions, suggesting investors were shaking off some of the jitters that burdened markets this month.
Stocks have struggled since the start of August, when the last trade truce between China and the United States fell apart. The S&P 500 dropped 1 percent last week, when markets were whipsawed by updates on the fight and its growing effect on the global economy. The S&P 500 is down 1.9 percent in August, though it remains up 16.7 percent in 2019.
Evidence has been gathering that conflict over trade, technology and economic hegemony has been weighing heavily on some countries that rely on industrial exports. Germany’s trade-heavy economy, the largest in Europe, contracted in the second-quarter, raising the question of whether the country is on the verge of recession. A separate report showed Chinese industrial production grew at its slowest pace in 17 years.
In the United States, a report on industrial production last week showed that manufacturing output declined in July, compared with the same period last year. Yields on long-term Treasury securities plummeted last week, pushing them even further below shorter-term yields.
This unusual bond market situation — known as an inversion — unnerved investors, because they have proved reliable harbingers of recession in the past. It also raised concern that global weakness could be bleeding into the American economy.
But the recent numbers from top American retailers tell a different story. Last week, Walmart reported better-than-expected profit and sales and raised its full-year profit outlook. Home Depot on Tuesday also bested the earnings expectations of analysts, and held firm to its previous profit forecast for 2019. Share prices of both companies jumped at the announcements. The earnings reports from Target and Lowe’s confirmed the trend.
No issue is more important for the American economy than the health of its consumers. Consumption accounts for over two-thirds of American gross domestic product.
And consumers have only become more important recently, amid signs of sluggishness elsewhere in the American economy. Home building, exports and business investment all shrank during the second quarter, leaving consumption — which grew at a 4.3 percent annual pace — as the key driver of growth.
Many analysts see good reasons to expect that Americans will continue to open their wallets. At 3.7 percent, unemployment is near 50-year lows. Wages have posted some of their fastest increases of the economic expansion over the last year. Consumer debt levels are high, but low interest rates mean that households are having little trouble making their payments.
That backdrop has helped muffle the effect the noisy trade fight between Beijing and Washington has had on American consumers.
“Despite all these tariffs and despite all this rhetoric, they continue spending,” said J. Michael Gibbs, director of portfolio and technical strategy at Raymond James in Memphis.
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