Trade Fears - Stocks Decline Friday

The stock market had no business increasing on Friday since the latest news on trade is China isn’t ready to negotiate with America. That’s not a big surprise because they wanted to change what was already agreed upon and Trump held firm. Stalled trade talks are bearish. 

A former Chinese commerce minister and diplomat stated, “If the U.S. doesn’t make concessions in key issues, there is little point for China to resume talks. China’s stance has become more hardline and it’s in no rush for a deal." I don’t expect a deal to be made by June 1st.

S&P 500 can’t hit a new record high until there is a trade deal or economic reports improve. To be clear, the regional Fed manufacturing reports beat estimates and the recent housing data has been solid. However, weak headline industrial production and retail sales growth have held back Q2 GDP estimates. 

While I think it’s possible industrial production and retail sales regain form next month, stocks can’t trade as if that has happened. 

Stocks traded all year like the slowdown ended late last year, but it hasn’t.

S&P 500 opened lower and rallied sharply late in the morning. It then fell sharply in the last hour of trading to close down 0.58%. Nasdaq fell 1.04% and the Russell 2000 fell 1.38%. VIX was up 4.38% to 15.96 which pushed the CNN fear and greed index back down to 36 from 39. 

In the University of Michigan consumer confidence survey, 63% of consumers stated they expect the stock market to rise in the next year. That’s up from the low of 57% in January and just below August’s peak. It’s no surprise consumers expect stocks to rise because of the recent rally and because they expressed optimism about the economy in that survey.   

Just like when stocks were falling sharply on Monday, the utilities sector was the only one that was up as it increased 0.48%. Investors love utilities because economic growth is still low, the trade war doesn’t hurt them, and yields are low. The 10-year yield closed at 2.39% and the 2-year yield closed at 2.20%.

 Since the weakness was broad-based, there weren’t any terrible performing sectors. The 2 worst were the industrials and energy which fell 1.1% and 1.05%.

E-commerce Sales Growth Increases

Q1 e-commerce sales growth was 3.6% on a quarterly seasonally adjusted basis. That was up from 2% last quarter. Yearly growth was an amazing 12.4%. Because of this acceleration, online sales as a percentage of total retail sales increased 0.3% to 10.2%. It finally hit the double digits. I had been expecting this threshold to be hit for a few months. 

There is still a lot of runway for online sales growth to gain share. If you asked 20 somethings to guess the amount of retail spending done online, I bet you’d here them say 30% or more. This is a demographics and logistical issue.

Q2 GDP Estimates

Housing starts report caused the Atlanta Fed Nowcast to increase to 1.2%. That’s a relatively bearish reading compared to other projections. The median of 8 estimates in the CNBC rapid recap is for 1.9% growth. Estimates range from 1.7% to 2%. 

Since March 1st, most of the NY Fed Nowcast’s weekly estimate updates have shown higher expected growth. However, it plunged sharply on Friday. It went from expecting a 2.2% growth to just 1.79% growth. The industrial production report hurt growth by 0.55% and retail sales hurt it by 0.09%. 

This is the worst Q2 Nowcast since March 29th. The St. Louis Fed Nowcast is much more optimistic than the rest as it sees 2.72% growth.

Average of all these estimates (weighting the CNBC average by 8 because it includes 8 forecasts) is 1.8%. Even though I’ve been a bear on Q2 and Q3 growth for a while, I’m more optimistic than these estimates. I expect retail sales and industrial production growth to improve in May. 

Expecting somewhere between 2% and 2.5% growth isn’t exactly expressing outright optimism. That’s trend growth. The estimate just looks good compared to everyone except the St. Louis Fed. NY Fed estimate is usually pessimistic and the St. Louis Fed is usually optimistic. The Atlanta Fed reading is all over the map.

Trade Fears - Recession Odds Are High

NY Fed’s recession probability model in the next 12 months shows there is a 29% chance of a recession. That doesn’t seem like a lot, but the model almost never states there is over a 70% chance of a recession. 

As the chart below shows, ahead of the 2008 recession, the model only showed there was a 38% chance of a recession. Ahead of the 2001 recession, there was a 26% chance of a recession which is below the odds now. Ahead of the 1990 recession, there was a 31% chance of a recession in the next year. 

Fed funds futures market shows there is a 73.4% chance of a rate cut this year.

(Click on image to enlarge)

Earnings Recession?

Latest FactSet reading shows that Q1 earnings growth will very likely be negative. Growth is -0.5% with 92% of firms reporting earnings. That’s still much better than the -4% growth expected on March 31st. The estimate for Q2 growth fell from -1.7% to -1.9%. I think earnings estimates by June 30th will call for more than a 4% drop.

As you can see from the table below, The Earnings Scout estimates are all green. 

However, in the next 2 weeks, I expect the estimate for Q2 earnings to go red. The estimate will be much lower than the -0.66% Q1 estimate on April 1st. I expect growth to be positive, but less positive than Q1. I think Q2 will be the trough of this mini-earnings recession. 2020 will have much easier comparisons. 

Meaning, growth could get to the long run average if the economy isn’t in a recession like the NY Fed model expects.  

(Click on image to enlarge)