Forest for the Trees
Doug Walters
The S&P 500 fell for the third week in a row as the market set its narrow sights on weak earnings reports from department store retailers. Largely ignored was robust U.S. retail sales growth of 3%. Investors may not be seeing the forest for the trees.
Market Review
Contributed by Doug Walters
Directionless
After a promising start to the week, stocks slid with the S&P 500 ultimately ending the week in the red. Volumes were generally low as investors appeared to lack conviction both on the initial rise as well as the eventual decline.
- Directionless is a good way to describe the current market. Investors are understandably cautious with valuations above average and earnings slipping for much of the past year and a half. Add on top of that a contentious battle for the White House and it’s a wonder that volatility has not been higher.
- With that said, we still see the U.S. as a relative pillar of strength in an economically challenged world. The decline in earnings is slowing, and we are beginning to see leading economic indicators both in the U.S. and China appearing to bottom – a positive sign for equities.
Freaky Friday
Retailers found themselves in the crosshairs on Friday the 13th. Despite a fairly encouraging (in our view) retail sales report, investors zeroed in on a pair of weak earnings reports from department store retailers Nordstrom (JWN, see the Strategy section) and Kohl’s (KSS).
- There is no question that traditional department stores are coming under pressure from online and discount stores. However, the retail sales report showed that the consumer is still alive and kicking in the U.S. (see the Economic section).
- The bigger question for retailers to ask themselves is not whether the consumer is spending, but is their business model still relevant in a world where transactions are increasingly completed online.
Economic Commentary
Retail Sales Up
After a slow start at the beginning of the year, retail sales came in strong last month with sequential growth of 1.3%. This rate was the highest in 13 months and handily beat expectations. The top contributors include:
- Automobiles
- Gas stations
- Online shopping
As the job market recovers and people return to work, more of them buy cars. As interest rates and financing remains cheap, consumers are increasingly incentivized to finance their car purchase. As a result, automobile sales have been strong with month-over-month sales up 3.5%.
Revenue from gas stations are correlated with oil prices and as oil prices rebounded last month, gas station revenue increased. Consumers are paying a little bit more at the pump.
Online and catalog sales were up 2.1% sequentially last month and continue to grow at a double digit annual rate. The secular trend towards online shopping remains strong with Amazon now having 7% market share of all US retail sales. Put another way, one out of every fourteen consumption dollars is now spent on Amazon. Most analysts believe this ratio will continue to appreciate and may even triple by 2020.
Week Ahead
Contributed by Aaron Evans
Hot Seats
Presumptive Republican nominee Donald Trump sat down for a highly anticipated interview with Fox New anchor Megyn Kelly which will air on Tuesday.
- Kelly became a target of Trump’s “criticism” following her co-moderation of one of the first Republican primary debates; the two traded a series of very public and contentious social media blasts.
Geek Week
Strategic holding Alphabet (Google) will host its annual I/O conference next week where developers from around the globe gather to “explore the next generation of technology, mobile and beyond”.
- Rumors suggest that Google will announce a standalone Android Virtual Reality headset at I/O, as the company attempts to compete with existing VR players HTC (Vive), Oculus (Rift) and Samsung (Gear VR).
Bottom Lines
Q1 earnings reports continue to roll in with Strategic holdings Wal-Mart, Deer & Co. and Merck due next week.
Strategy Update
Contributed by Doug Walters , Max Berkovich
Strategic Asset Allocation
High Energy
Energy-linked commodities like oil and natural gas resumed their upward move this week. Prices are well off their lows from earlier in the year, however, inventories remain elevated and supply abundant. Until we see better balance between supply and demand, the extent of the increase will likely be limited in the near-term.
Bigger is Better
This week we saw a notable gap in performance between large and small cap stocks. While both were down, small-cap stocks were far more in the red by the time the market closed Friday. Other diversifiers, like Emerging Markets, were also particularly weak. Fixed income did its part, offsetting the normal volatility of equities. None of these moves have been significant enough to warrant a rebalance of our asset allocation.
Strategic Growth
Retail tale
An odd couple of Energy and Consumer Staples were in the lead this week. The Consumer Discretionary sector was the laggard, dragged down by a poor showing from retailers and a lackluster earnings report from…
- Walt Disney Corp. (DIS) reported earnings that missed expectations for the first time in two years. It appears the television and consumer products divisions were the antagonist, given that the parks business revenue was up 4% and the movie division was up 22% from a year ago. The most striking issue is succession. CEO Bob Iger has two years left and his heir apparent Tom Staggs stepped down abruptly April 4th.
Strategic Equity Income
Hanging on the Rack
Utilities and Telecom sectors and REITs responded to lower interest rates with a customary pop to the top. The Consumer Discretionary sector had a tough week even before Thursday night’s earnings report from…
- Nordstrom Inc. (JWN), the up-scale retailer, reported an extremely weak quarter. While the economy, weather, politics, competition, etc. were used as excuses, the big fear is whether consumers’ purchasing behavior has changed. Nordstrom’s discount concept, Rack, was the lone bright spot.
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