Retail Stock Bellwether Showing More Storms Ahead

The condition of the U.S. economy continues to be a major risk factor for stocks. The recent June retail sales data that came out pointed to a slowing retail environment, Retail sales grew 0.1% in June and 0.8% excluding auto, but it was short of the 0.4% and 0.9% estimates, respectively. I have been talking about the retail sector for some time and continue to be quite cautious.

A good bellwether for the retail sector is the credit and/or entertainment card business. On Monday, American Express Company (NYSE/AXP) reported a 38% year-over-year decline in its second quarter earnings and indicated that it would need to increase reserves for any bad loans. The interesting thing here is that American Express is generally known as a card for higher income users, so it shows that the decline in consumer spending is also impacting those with more capital resources. According to the company, cardholders with credit scores from 650 to 750, who receive the most reduced interest rates, are demonstrating some payment problems. For the third and fourth quarter, the company predicts higher write-offs of bad loans.

What is happening at American Express could also hit the other key credit card companies, such as Visa, Inc. (NYSE/V) and MasterCard Incorporated (NYSE/MA).

The reality is that what happens in the retail sector will impact economic growth and this will impact corporate earnings. The second-quarter results have been mixed at best and indicate a cautious operating climate for companies. There is a sense that the third quarter, which some had hoped would begin to reverse, will continue to suffer and will lead into the fourth quarter. The statement from American Express regarding the second half of the year reflects this fact and is something to be aware of. I would continue to be hesitant of buying retail stocks, but, at the same time, keep a list of those that are of interest when the time comes to buy again.

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