Slumping retail pushed the stock market lower Wednesday, completely wiping out gains from earlier in the week. The retail sector has been struggling as consumers, wiser after getting caught short in 2008, now put a check on personal spending at the first sign of trouble. The wisdom of the crowd was out ahead of the market analysts this time.
Complicating the retail picture was a trend away from brick and mortar stores that was well underway before yesterday’s meltdown. As many as a third of America’s shopping malls are predicted to close in the next few years as a younger generation shrugs off the mall experience. But retail is just the canary in the coal mine that warns of bigger problems ahead for our economy.
Retail tends to get the initial impact when market selling starts because it represents discretionary consumer spending. Yet there have been danger signs of a broader negative vortex for some time. Weakness in the Chinese economy, U.S. and foreign corporate debt, particularly in the energy sector, and central banks that have run out of policy options are just a few of the major challenges the economy faces. In the U.S. we’re also confronting the escalating economic and market impact of more-than-usually contentious and corrosive election season.
Oil Still Looms
A tragic fire in the oil-producing Canadian town of Fort McMurray, plus a tentative agreement among exporter nations in the Middle East has resulted in a temporary price recovery. But even at the—possibly short-lived—price of forty-five dollars a barrel, many U.S. energy companies are still in danger of collapse. Even these prices aren’t high enough to stave off default for shale oil and tar sands projects, many of which were started when oil was closer to a hundred dollars a barrel. As oil companies fall, and they default on their bank debts, the impact to the economy is projected in the billions of dollars.
Betting Against Our Better Interests
Predictably, some Wall Street insiders are betting big that our economy is going to falter further. Billionaire investor Carl Icahn is going short on the market in a big way, betting billions that the market is going to tank and be slow to recover. Icahn points out that market prices have been pushed artificially higher due to extended low interest rates. Even the most conservative Wall Street watchers see a greater chance of a twenty percent crash than a twenty percent gain.
A Polarizing Election
Regardless of who wins the election in November, this year promises to produce the most polarized and divided electorate ever. Many voters are dissatisfied with politicians they see as representing donors rather than constituents and, even if they can’t agree on issues, voters on both sides of the spectrum seem willing to scrap the status quo. This divisive political atmosphere is going to make it nearly impossible for Congress to agree on any measures to advance the U.S. economy. In addition, talk of tampering with trade agreements and other economic policies is making Wall St. jittery.
The Fed, Always
The Federal Reserve has committed itself to raising interest rates at the worst possible time for the economy. With many companies already struggling with debt, pushing interest rates higher will simply push more of them over the edge.
Watch the Unemployment Numbers Closely
All we need to kick off a real disaster now is a slight uptick in unemployment. Pink slips are the catalyst that kicks off a downward spiral in the economy. When first time unemployment claims start to rise, a market rout is usually not far behind.
The sole glimmer of good news is for gold and silver investors. If you took our advice late last year and sold off some stocks in favor of gold, you’re looking at solid gains and more room to run in 2016. Otherwise, it’s going to be a long, hot summer.