Investors take note of consumer spending

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — May 21, 2018

 

Stocks struggled last week, unable to overcome a further rise in bond yields that was triggered, in part, by some otherwise good news from the consumer sector. The S&P 500 index fell 0.5 percent, as stocks failed to build on the strong gain from the week prior. The yield on the ten-year Treasury note ended closed at 3.06 percent, higher by nine basis points, but reached 3.11 percent on Thursday, its highest level since the summer of 2011. The dollar index (DXY) also surged higher by 1.2 percent. Not surprisingly, rate sensitive utility and real estate stocks suffered sharp losses. 

Most of these moves higher came on Tuesday after the April retail sales report was released by the Department of Commerce. It showed a healthy, but not surprising gain of 0.3 percent. However, the already robust gain 0.6 percent gain in March was revised even higher, to 0.8 percent. The March increase was the first after three consecutive months of declines, and taken together with April indicates that the consumer is shaking off the lingering effects of winter. Although the stock was down following its first quarter earnings announcement, Home Depot said first quarter weakness was weather related and that otherwise its business was firm and improving along with the weather. Macy’s share price rose sharply following a better than expected first quarter. And Walmart reported strong first quarter sales growth in its U.S. division. Nevertheless, on balance, consumer stocks were flat for the week. 

It is not all clear sailing for consumers, however, as higher gasoline prices continue to exact their toll on consumer wallets. AAA reports that the national average price of a gallon of regular unleaded is now $2.92, up $0.05 on the week, up $0.18 in the past month, and up $0.57 in the past year. Crude oil rose once again last week, although the gain in West Texas Intermediate (WTI) was a relatively modest $0.58 to $71.28 a barrel. That is still higher by 19 percent since the start of the year. Energy stocks were the strongest gainers at the sector level last week. They were joined on the upside by both industrials and materials.

Small cap stocks add to their recent gains

Small cap stocks seemed to mostly ignore the worries of larger stocks. The Russell 2000 index climbed 1.2 percent last week, adding to its recent gains. Since the start of April the Russell 2000 index is higher by 5.5 percent, more than doubling the gain in the S&P 500. Small cap stocks are relatively impervious to the latest concerns of larger companies, including a strong dollar and rising trade tensions, especially companies with significant foreign sales volume. 

On the trade front there appears to have been some progress of sorts made between the U.S. and China after two days of negotiations last week. Concessions from both sides impacting specific products and companies, were joined by a more general Chinese commitment to buy more U.S. goods and services, although not a commitment to reducing its trade surplus with the U.S. by a specific dollar amount that the administration wanted.

The S&P 500 seeks economic growth to move higher

Despite the inability of the S&P 500 to post a gain for the week, somewhat encouragingly it did manage to close each day above its 100-day moving average. That makes seven days in a row that it has closed above that level, after spending fifteen straight days below it dating back to April 19. When added to the recent strength in capital spending, last week’s news from the consumer sector suggests that the second quarter could be stronger than the first. The revision to retail sales in March indicates that first quarter GDP may also be revised higher. If stocks are going to break from their recent trading range, there must be evidence of economic growth that is fast enough to deliver on earnings expectations. Consumer participation is critical if that is to happen, and last week’s news was a welcome bit of evidence that they may deliver.

This week’s economic calendar includes durable goods, new home sales, flash purchasing managers’ indexes (PMIs), new and existing home sales, and consumer sentiment. But the most important release may be the minutes from the Fed’s May meeting. The Fed chose to leave rates unchanged at that meeting, but did make particular reference to inflation in its statement, and expectations of a fourth rate hike this year have risen since.