Thursday, May 12, 2005

Alternative market recap: Oil beats Wal-Mart

I frequently chastise the financial press for trying to explain away the stock market’s random day-to-day fluctuations by latching to an eye-catching event that probably has little to do with what happened.

Today offers a great example. Stocks fell across the board, though the drop was unremarkable (about 1%). There were three important pieces of news: oil prices dropped sharply for the second day in a row amid reports of slower than expected demand growth and high inventories, U.S. retail sales rose strongly in April and Wal-Mart reported disappointing first quarter earnings, in addition to warning that this quarter’s results would also be weak due to high gas prices.

Reporters spun it this way: Falling oil prices in April helped boost retail sales much more than expected, yet these two pieces of good news were offset by Wal-Mart’s earnings miss and its fairly gloomy forecast for this quarter, not to be taken lightly coming from the world’s largest retailer.

However, why should Wal-Mart be so pessimistic given that oil prices are falling? Doesn’t less expensive energy help consumer spending? Needless to say, reporters got very confused (see this example of tortured logic). In the end, since stocks fell, they mostly blamed the largest and best-known target: Wal-Mart.

Actually, today’s performance can be explained quite easily. The energy sector represents arount 10% of the S&P 500 and today it fell around 4% on average. This alone explains about half the drop. Most of the rest can be accounted by the retreat in financial sector stocks (around 1% today, but they make up more than 20% of the S&P 500), probably attributable to recent market jitters concerning hedge funds

And Wal-Mart? Yes, it’s big and its announcement didn’t help. But keep in mind that the consumer staples sector --which has a similar weight compared to the energy sector--to which it belongs actually fell only 0.5% today according to S&P’s data, much less than the market as a whole.

In any case, one shouldn’t read too much into one day’s figures. Stocks fluctuate for any number of reasons day after day. But if you do keep track of these things, always check broad sector trends, which are always more representative than extrapolations based on the performance of one or two stocks. Standard & Poor’s provides these figures on a daily basis.