Market Roundup
Dow -157.41 to 16,924.48
S&P -9.45 to 1,994.24
NASDAQ -13.76 to 4,782.85
10-YR Yield -0.07 to 1.98%
Gold +$22.50 to $1,187.80
Oil -$0.04 to $47.11
“First There, Now Here.” That’s my mantra for the economy and the markets.

By that I mean, the economic and market turmoil started predominantly overseas. I’ve chronicled the meltdowns in several emerging markets like Russia, South America and Asia. I’ve also written about the more recent widespread deterioration in conditions in China — the world’s second-largest economy.

But unlike most of the conventional Wall Street crowd, I’ve also said the problems won’t stay bottled up overseas. They’ll wash up on our shores. Hence the “First There, Now Here” mantra.

We got the first major taste of that in the September jobs report, which was pretty darn lousy. Then today, we got more confirmation of problems on the retail spending and inflation fronts.

Deflation is now a rising concern regarding the U.S. economy.

Overall retail sales rose just 0.1%, half the gain expected by economists. August’s 0.2% gain was revised down to nothing.

Retail sales excluding autos fell 0.3% — the biggest drop since January. And the so-called “control group” figure that is used by the government to estimate Gross Domestic Product growth fell 0.1%. Seven out of 13 product categories showed declines.

What about the Producer Price Index? The wholesale inflation gauge dropped 0.5% in September after flat-lining in August. That was worse than the 0.2% decline economists were expecting.

It wasn’t just energy or food dragging down the index, either. So-called “core” prices fell 0.3%, compared with forecasts for a 0.1% gain. One separate index that economists prefer showed the worst deflation (-0.3%) since the government began calculating it in 2013.

See what I’m getting at? This is a domestic economy that’s clearly starting to decelerate, dragged down by slowing world growth, tighter credit markets, the problems in energy, mining, and manufacturing and more. Production cutbacks and layoffs tied to the over-accumulation of inventories will come next.

“Markets lack both healthy earnings growth and a healthy underlying economy.”

Stocks aren’t GDP futures. They rise and fall for all kinds of reasons. But when markets lack both healthy earnings growth and a healthy underlying economy, they have a tougher time racking up powerful, sustainable gains. So keep that in mind, especially with the Dow Industrials 1,100 points off their lows in late September.

What do you think of the latest sales and inflation figures? Do they point toward a serious problem for the U.S. economy? Or do you find reasons for encouragement in them? Should we even be worried about the macroeconomic backdrop, or is it still all about easy money? Join the discussion at the Money and Markets website when you have a chance.

Our Readers Speak

What’s going on in China? How will our markets react? Should we be worried, sanguine or greedy? Those are some of the questions you answered over at the website in the last day.

Reader Chuck B. said: “As for China’s economy, they have a weird combination of Communist-type central planning, and private enterprise, and it is hard to see how that will work out in the long run.

“Of course, we are not far different, having put much infrastructure under government control. China has largely copied us there. The only thing is their government is building their infrastructure rapidly. Ours is letting it deteriorate.”

Reader Michael C. added: “My hunch is that the China situation will eventually register with those denying China’s economic downturn, and more importantly, the importance of the China downturn on the world economies. The reaction will be overdone, which seems to be the case lately with so many things.

“Not that the U.S. is as safe as it should be, but we will be perceived as a safe harbor compared to so many other economies. As a result (and it’s already underway), smart money, and eventually even dumb money, will flood into the various U.S. investment vehicles. With any luck, this will get going full force next spring.”

Not everyone is sold on the idea of capital flows propping up stocks regardless of the underlying fundamentals, though. Reader Norman said: “We are now six-and-a-half years into this ‘bull market.’ Like a friend told me, ‘You can coast for seven years, and then the work begins.’ Most signs point to a downtrend — you decide.”

And finally, Reader Anthony G. said: “The debt levels in the global economy are not sustainable. The cheap money is a curse not a blessing. When interest rates rise, the sins will be exposed.”

Thanks for weighing in. Hopefully, I’ve made it clear what I expect: The firmly established downtrend in world markets and economies is starting to wash up on our shores. That means we should expect more deteriorating economic data here at home, and even more downward pressure on stocks as a result.

That doesn’t guarantee a bear market, of course. But it certainly raises the likelihood of one. So invest with that in mind. If you haven’t already pinged me with your thoughts, here’s the link again.

Other Developments of the Day

● Goldman Sachs (GS) is getting swept up in a corruption scandal tied to a fund called 1Malaysia Development Bhd, according to the Wall Street Journal. The fund may have misappropriated money and/or been used as a type of slush fund for Malaysian Prime Minister Najib Razak, and Goldman advised it on several transactions. Authorities here in the U.S. and abroad are not yet accusing the bank of any wrongdoing, however.

● Democratic nominee Hillary Clinton came out firing against Vermont Senator Bernie Sanders in the first debate held in Las Vegas yesterday. Post-debate analysis generally suggests a strong showing for the presumptive frontrunner.

● Several stabbings and shootings in Israel have ignited a security crisis in that country. Army and police units are establishing more checkpoints and a heavier presence in the streets after dozens of Israelis and Palestinians have died in attacks and counterattacks there.

● If you love spending 19 hours on an airplane, then you’re in luck. Singapore Airlines is going to bring back the world’s longest flight — Newark, New Jersey, to Singapore — sometime in 2018 once Airbus supplies it with a new, more fuel-efficient jet. The service was suspended in late 2013, but the new Airbus A350-900ULR jet will allow Singapore Airlines to economically run the route again.

● Meanwhile, the biggest retailer in the U.S. — Wal-Mart Stores (WMT) — just warned at an investor day that sales won’t rise at all next year. It also said earnings remain under substantial pressure, because operating expenses are growing faster than revenue. That sent the stock down around 10%, its worst one-day decline in 17 years. If that doesn’t demonstrate how Main Street America is struggling, or how retail sales growth remains punk in this economy, I don’t know what does.

Would you like to spend almost an entire day in flight? What do you think about the latest debate? And will we ever have lasting peace in the Middle East? The website is a great outlet for you to share your thoughts, so be sure to use it.

Until next time,

Mike Larson