The scary undertow pulling down retail stocks

After a bit of a reprieve, investors in retail stocks are getting hit with more bad news.

Just look at Monday's carnage: 

  • Troubled teen retailer Abercrombie & Fitch (ANF) fell 21.1 percent after announcing it had terminated possible sale discussions. 
  • Dick's Sporting Goods (DKS) dropped 7.2 percent on a downgrade from Cleveland Research.
  • Best Buy (BBY) lost 6.3 percent on reports Amazon (AMZN) is building its own "Geek Squad" of tech service providers. 
  • Sears Holdings (SHLD) fell 4.1 percent after announcing it would close 43 more stores and said some vendors are pulling support on fears of a cash crunch. 

Overall, the S&P Retail SPDR ETF (XRT) -- which comprises a basket of retail stocks -- has fallen out of a three-month consolidation range to test lows not seen since January 2016. That's a decline of nearly 19 percent from the post-election high set back in December amid optimism for the holiday shopping season.

Yes, well publicized structural woes are plaguing the sector (mainly, the onslaught from online competitors like Amazon). But something seems to be affecting the American consumer overall. And not in a good way.

The latest data shows a clear rise in income, which posted the best monthly gain in May since 2015 due, in part, to a recent pullback in energy prices as well as ongoing labor market tightening. The unemployment rate recently ticked up to 4.4 percent, after falling in May to just 4.3 percent, the lowest since the dot-com boom. June's slight rise came on an expansion in the labor participation rate as more Americans started looking for a job.

Yet consumer spending has been slowing. Retail sales have been falling off. And gasoline demand -- during the height of the summer driving season -- is collapsing at a pace last seen since 2011,  according to data compiled by Yardeni Research. Total auto sales are also stuck in reverse so far in 2017 (chart below).

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There's more. Look at the major stock price decline suffered by auto parts retailer O'Reilly Automotive (ORLY). After enjoying a three-year run just below the $300-a-share level, the stock is down nearly 40 percent earlier this year (chart below) after management pre-announced weak results for the company's earnings report due on July 26. 

Officials noted that June same-store sales (sales at stores open a year or more) increased 1.7 percent vs. prior guidance of a rise of 3 percent to 5 percent.

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When consumers are willing to forgo basic car maintenance and cleaning, you know something's up. 

We'll learn more about the consumer health when updated retail sales numbers are reported on Friday. Economists are looking for a small 0.1 percent monthly gain. 

But any further disappointment will raise deep questions about what happened to all that post-election ebullience. Perhaps, a lack of progress by Congress on legislation concerning tax reform and health care?

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.