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Spotlight on May Fund Outflows, Retail Sales

Bob Pisani is off; this post was written by CNBC producer Robert Hum.

In almost a flip-flop of yesterday (Tuesday), the markets posted a strong late-day rally Wednesday afternoon. The major indices finished the day up well over 2 percent, closing the session at the highs of the day — quite a contrast to yesterday’s drop at the end of the day.

Leading the rally today are sectors that were noticeably beaten up yesterday. The more high-beta, cyclical names (commodity stocks, financials, transports, techs) were all up 2 percent to 4 percent today.

But despite the solid this rally this afternoon, trading volumes remained relatively light at the close, with just over 5 billion shares trading at the NYSE.

While today’s gains come as a sigh of relief, a couple of reminders on how poor May was for the markets:

1) Investment Company Institute today reported over $17 billion in equity fund outflows (the highest in a number of weeks) in the week ended Wednesday, May 26. During that time, the S&P 500 was down 4 percent.

2) Charles Biderman, CEO of TrimTabs, also notes that U.S. equity funds saw their 5th largest monthly outflows last month. In May, U.S. equity funds saw $30 billion in outflows, topped only by outflows in July 2002 ($49 billion), October 2008 ($47 billion), January 2008 ($36 billion), and September 2008 ($34 billion).

Retailers In-Focus Tomorrow

Thursday, retailers will report their May sales, providing greater insight on the current state of the consumer. Although retailers have seen stronger sales for much of the year, indications are that May sales could be quite disappointing — one reason why retailers remained very cautious recently when providing Q2 earnings guidance in their latest round of earnings reports.

In fact, according to RetailMetrics, same-store estimates for May have been coming down throughout the month. At the beginning of May, comps were expected to grow 4.0 percent. However, they have been dropping since, and current expectations are now settling in at a gain of only 2.9 percent. Seeing particularly weak sales last month were teen retailers, a group that may likely even see a DECLINE in comps.

So why the potential for a disappointing May in the retail space? A number of factors have contributed to the challenges last month:

1) Cooler weather at the start of May hampered sales of seasonal apparel. Weaker sales early in the month were also evident in the International Council of Shopping Centers’ (ICSC) recent reports. Today, the Council reported a small 0.6 percent rise in chain store sales over the past week, which reversed two straight weeks of declines. Why the rise last week? The Council’s Chief Economist Michael Niemira noted that “warmer seasonal weather helped propel apparel-store demand.”

2) A late Memorial Day this year also negatively impacted sales since shopping has largely still been event-driven (recall Valentine’s Day, President’s Day, and Easter helped spur sales in February and March). The good news for retailers though: June sales should see a boost from the late Memorial Day holiday.

3) Consumers may have had reduced amounts of discretionary spending in May. Consumers’ wallets may have felt a pinch throughout the month due to a 25% rise in gas prices from the prior year and as a jump in home purchases (resulting from the recent expiration of the Federal tax credit) could have limited the amount of money consumers put aside for shopping in May.

4) Lastly, while job hirings have been increasing, unemployment still remains high. Economists expect the government to report a May unemployment rate of 9.8 percent this Friday, down only slightly from April’s 9.9 percent rate.

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