Dow Sugar Rush Fades as Economic Data Vindicate Weak GDP Forecasts

• The Dow rapidly slid into decline after Donald Trump threw the US-China trade deal outlook into disarray.
• US retail sales data came in weaker than expected.
• A weakening consumer sector could vindicate bearish growth forecasts.

The Dow unexpectedly struggled on Friday, as the sugar rush metabolized by optimism about a last-minute US-China trade deal ran its expected course and then suddenly evaporated.

The outlook for the trade deal is currently unclear, but one thing is certain: When investors finally glance beyond those headlines to the economy’s underlying fundamentals, they might not like what they see.

Dow Slides as Trade Deal Optimism Vanishes

Wall Street’s three major indices fell at Friday’s open, as investors woke up from Thursday’s trade war reverie to find themselves beset with a painful hangover.

• The Dow Jones Industrial Average slid 51.02 points or 0.18% to 28,081.03.
• The S&P 500 declined 3.87 points or 0.12% to 3,164.70.
• The Nasdaq dipped 7.03 points or 0.08% to 8,712.79.

US stock futures had implied spectacular gains, but the Dow’s rally rapidly faded after President Donald Trump called a report about the trade deal “completely wrong.”

New Data Points to Weak Economic Growth

With all the focus on the trade deal – not to mention what comes next – Dow Jones bulls might miss that US retail sales data underperformed estimates by a wide margin in November.

Despite a presumed boost from holiday shoppers, retail sales edged just 0.2% higher from October, well below the consensus forecast of 0.5%. Core retail sales, which excludes the volatile automobiles category, climbed 0.1%, compared to an expected 0.4%.

The data suggested that US consumers have begun to trim discretionary spending from their household budgets, which may vindicate warnings that already-sluggish US growth could slow even more than expected in 2020.

ING has predicted that US GDP will rise just 1.4% next year, lagging the consensus forecast of 1.8%. According to ING Chief International Economist James Knightley, the Federal Reserve will likely be forced to alter its policy outlook – the latest Fed dot-plot indicated no interest rate cuts in 2020 – and slash rates twice more by the end of June.

Commenting on today’s retail sales reading, Knightley wrote,

We see the loss of economic momentum continuing into 2020 despite the market optimism on the latest jobs numbers and the heightened expectation of some form of trade deal.

Business investment had already begun to slow prior to today’s retail sales data release, and this week’s producer inflation reading was more lackluster than economists expected. In ING’s view, it’s only a matter of time before that weakness bleeds further into the consumer sector.

A limited trade deal – assuming there actually is one – might prevent tariffs from weighing even heavier on the economy, but the mitigating downside risk isn’t the same thing as carving out potential for upside growth.