Is This the Bottom of the “September Slump?”

Stocks dropped significantly this morning despite better-than-expected retail sales data. The Dow, S&P, and Nasdaq Composite all retraced most of their gains from Wednesday.

The Census Bureau reported today that August retail sales rose 0.7% month-over-month, beating the consensus estimate (a 0.8% monthly decline) with ease. In the past, a “beat” of this nature typically sent the market higher.

But in addition to releasing the August numbers, the Census Bureau also revised July’s retail sales stats from a 0.5% month-over-month gain to a sharp decline of 1.8%.

Relatively speaking, that made August’s 0.7% jump far less impressive. Disappointed traders took out their frustration on equities by selling shortly after trading opened. First-time weekly jobless claims only added to the bearishness, as 332,000 fillings were made last week vs. 320,000 initial claims expected.

“People are starting to see that some of the economic data that we’ve received lately has been affected by Delta and are probably waiting for some of the effects of that to roll off,” explained Crossmark Global Investments strategist Victoria Fernandez.

“I think we’re going to see a little bit of ‘two steps forward, one step back’ in the markets over the next few weeks.”

Akshata Bailkeri, equity analyst at Bruderman Asset Management, also noted that bullish exuberance may be starting to fade in the face of rough economic reports.

“Equity markets have been positive for seven consecutive months, which is quite rare […] So yes, investors are rightly concerned,” Bailkeri said.

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“But the reason why we’re seeing this is because these earnings behind a lot of these companies are continuing to grow, and that’s really what’s driving these index values higher.”

Meanwhile, rising inflation and producer costs threaten to squash Q3 earnings. The Producer Price Index (PPI), which measures producer inflation, climbed higher again in August in response to rising transportation and input costs.

Those increased costs will either be passed on to the consumer (which would then be reflected in the September Consumer Price Index reading) or absorbed by producers, slimming margins. Either way, share valuations would likely fall as a result.

This disturbing trend was first observed with Clorox (NYSE: CLX) when it reported earnings back in early August. The company unveiled a massive earnings per share (EPS) miss of 95 cents (vs. $1.36 expected) and a sales miss of $1.8 billion (vs. $1.92 billion expected). Worse yet, Clorox leadership said that they only expect the company to earn between $5.4 billion – $5.7 billion in fiscal 2022. Analysts originally projected $7.67 billion in earnings for fiscal 2022 by comparison.

If other American manufacturers issue similar reports come earnings season, the market could easily plunge thereafter. The tech sector wouldn’t get hit as hard, but overall, it may turn out to be a very grim affair for bulls.

The majority of S&P companies won’t report until October. Analysts predict earnings growth of almost 28% year-over-year for Q3. Should the S&P “miss” Q3 earnings due to inflation, serious pain could follow.

“I don’t think statistics or just how long it’s been is a good reason [for a correction]. Generally, you need some sort of a negative catalyst,” said Charles Schwab’s managing director of trading derivatives, Randy Frederick.

“What we have right now is not negative catalysts so much as a lack of positive catalysts.”

A group of inflation-driven earnings “misses” would certainly do the trick. But, unless it actually happens, staying long remains the most sensible move.

Especially at what looks like the bottom of a mid-month dip.

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