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May 13, 2019

Markets | Retail’s Latest Challenge—Higher Tariffs by Amrith Ramkumar.

The Wall Street Journal.
Markets Bear logo.
Markets
Welcome back. Amrith Ramkumar here to prepare you for the week ahead in global markets after more volatility Friday.
Futures are dropping this morning, with the S&P 500 coming off its worst week of the year despite a broad Friday afternoon rally that snapped a four-session losing streak.
It's the start of retail earnings season this week with results from Macy's and Walmart on tap, and we'll also get figures on April retail sales on Wednesday.
With those data points ahead, our Michael Wursthorn explains why they could have broader implications for the U.S. economy.

Market Facts

  • With its Friday afternoon rally, the S&P 500 closed above its 50-day moving average and avoiding what would have been its first dip below the closely watched trend line for the first time since Jan. 16, a potentially positive development for market technicians who use such lines to track an index's recent performance.
     
  • About $14 billion flowed out of U.S. mutual and exchange-traded funds during the week ended Wednesday, the largest weekly outflow since late January, according to a Bank of America Merrill Lynch analysis of data from fund tracker EPFR global.
     
  • On this day in 1986, with Wall Street embracing media and retailing stocks, Home Shopping Network went public, selling 2 million shares at an initial offering price of $18. The stock closed at $47.75, up 165%, probably the highest first-day return at the time on record.
 

Markets in a Minute

Markets Data
 

Overnight Developments

  • Global stocks dropped on Monday as tensions between the U.S. and China rose during trade talks, leaving investors grappling with fresh uncertainty.
  • Read our full market wrap here
 

Tariffs Pose Another Hurdle for Retailers

By Michael Wursthorn, stocks reporter
Shares of retailers, buffeted by rising trade tensions in recent sessions, face a key test this week when Macy’s, Walmart and others begin reporting quarterly earnings.
The S&P 500 Retailing index fell 3% last week after President Trump pushed ahead with tariff increases on billions of dollars of Chinese imports, outpacing the broader benchmark’s 2.2% decline. Shares of Macy’s slid 3.4%, while J.C. Penney and Ralph Lauren shed more than 5% each.

The slides could worsen this week once retailers begin reporting earnings, analysts said. Investors will want details on how merchants plan to absorb 25% tariffs on more than $40 billion worth of goods that are imported from China and directly purchased by U.S.consumers.
The tariffs, which took effect Friday, hit clothing, luggage, handbags and furniture, among other consumer products. And retailers have few options: Either they can absorb the added costs themselves, spread them across their vendors or pass them on to customers.
None are particularly attractive, analysts said, and their pain could signal broader implications for the U.S. economy. Initial estimates project the additional tariffs will shave 0.3% from U.S. growth this year.
“When this tariff conversation started last year, retailers were in a stronger position,” said Simeon Siegel, a senior retail analyst at Instinet. At the time, economic conditions were better and retailers were cutting back on inventories. “But now things have normalized, inventories are up again and retailers can’t really raise prices.”
Profit margins are already under pressure, as companies like Walmart and Target have been spending heavily on upgrading their digital capabilities and remodeling their stores. Absorbing higher tariff-related costs would further stifle margin expansion, analysts added.
In the previous earnings reporting season, both reported slimmer profit margins, but results were upbeat overall, helping to send shares higher.

Consumer-discretionary stocks, excluding internet retailers, are expected to see a 5.2% contraction in first-quarter profit margins from a year earlier, according to Credit Suisse. Margins among consumer staples, which includes stocks like Walmart, are expected to shrink 5.8%.
That could lead retailers to raise prices in an effort to protect their margins, analysts said, but companies run the risk of stifling revenue if customers pull back on spending. Retail spending has been mixed in recent months following a weak holiday sales season, a sluggish February and a rebound in March.

Key Events

The Boston Fed's Eric Rosengren gives welcoming remarks at 9:05 a.m. ET and Vice Chairman Richard Clarida speaks on the central bank's strategy review at a "Fed Listens" event at 9:10 a.m.
 

Must Reads

A trader works the floor of the New York Stock Exchange, May 9, 2019. PHOTO: Richard Drew/Associated Press
Volatility in stocks could unravel bets on calm markets. Recent swings in the stock market are threatening to unravel multibillion-dollar bets that rely on calm markets, potentially adding to investors’ jitters over the past week.
Lockstep market swings are worrying investors. Stocks and commodities around the world generally moved in tandem last week, stoking fears that declines could accelerate across riskier assets if the U.S. and China aren’t able to resolve their trade fight.
Citigroup is betting big on digital banking. Executives at Citigroup are convinced that many U.S. consumers are finally ready to leave the branch behind and fully embrace digital banking.
Oil giant Total is fueling a push in gas with an $8.8 billion Africa deal. Total SA’s deal to buy Anadarko Petroleum Corp. assets in Africa pushes its business deeper into dangerous regions while cementing its position as the world’s No. 2 supplier of liquefied natural gas.
Buffett and Bezos are missing out on long-term money. The absence of Amazon and Berkshire Hathaway from stock-market indexes for long-term gains reveals the difficulties faced by those who want a simple way to invest for a distant horizon.
Day traders are back, now playing with options. Brokerages including Charles Schwab and E*Trade say options trading by individual investors is growing. Compared with buying stocks, the fees and risk are considerably higher.
A Silicon Valley-backed venture has been cleared to become a stock exchange. Regulators approved a plan backed by Silicon Valley heavyweights to launch a new stock exchange that could appeal to hot technology startups.
 

What We've Heard on the Street

“How Uber will fare in its early days of trading is a tossup given the volatile nature of the markets lately and Lyft’s rocky reception. In the longer term, though, the company isn’t going away.”
—Heard on the Street columnists Laura Forman and Dan Gallagher
 

Stocks to Watch

Goldman Sachs: The Wall Street firm is nearing a deal to acquire investment management company United Capital Financial Partners, expanding its push into managing assets for individuals, The Wall Street Journal reported.
Uber Technologies: The ride-hailing company posted a rare first-day decline for a high-profile IPO Friday, closing its first day of trading at $41.57, 7.6% below its initial-public-offering price of $45.
Apple: The iPhone maker slid 6.9% last week, its worst weekly performance since Dec. 21, with U.S.-China trade developments rocking shares of companies closely tied to Chinese demand.
Newmont Goldcorp: The S&P 500 materials sector rose 1.3% Friday to snap a four-session losing streak, boosting shares of the gold miner, which also got a lift from gold prices rising for the fifth time in six sessions.

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