Retail Sales Improve - Stocks Rebound On Monday

It’s not a surprise stocks rebounded sharply on Monday because they had fallen 5 days in a row. Stocks are constantly reacting to previous overreactions. Dow even rallied 0.79% despite Boeing’s 5.33% decline. This occurred because its 737 MAX 8 plane crashed in Ethiopia killing 157 people. 

Apple was a big winner as it rallied 3.46%. Possibly due to the hype surrounding its March 25th event where it will be unveiling services related to streaming video and news. Apple TV has been rumored for years. It will be interesting to see the new services. To be clear, I’m referring to a streaming platform like YouTube TV, not the Apple TV hardware device.

S&P 500 was up 1.47%, Nasdaq was up 2.02%, and Russell 2000 increased 1.77%. I’m used to seeing more volatility to the downside than the upside. This time we had a few moderate declines and a big swing upward which brought back most of the gains. 

VIX fell 10.72% to 14.33. CNN fear and greed index increased 4 points to 59 which once again signals greed. It spent one day in neutral. This is the opposite of Q4 when it could never get out of the fear category.

Every sector was up as this was a broad-based rally. Best 2 sectors were technology and communication services which increased 2.17% and 1.86%. 

Big tech names were in the news because presidential candidate Elizabeth Warren wants to break them up. If she gains in the polls, their stocks will fall. However, she’s currently at 7% in the RealClearPolitics average of polling which is 4th place. That’s why they didn’t react to her proposal.

Retail Sales Improve - Bloomberg Consumer Comfort Closes In On A New Cycle High

As you can see from the chart below, the Bloomberg consumer comfort index increased from 61 to 62.1 which is very close to the October high. 

It’s not a surprise consumer comfort is improving because the stock market is highly correlated with confidence. With confidence improving, we might see retail sales improve. I will review the January retail sales report later, but right now I’m referring to how strong March’s sales might be. 

Redbook same store sales report comes out on Tuesday. Lately, it has been solid on a year over year basis, but terrible on a rate of change basis.

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Retail Sales Improve - Earnings Might Fall In Q1

Every week, the chances of earnings falling on a yearly basis in Q1 increase. 

As you can see from the chart below, the expectations for Q1 earnings growth fell from 6.26% on December 1st to -0.49% on March 11th. The decline has recently slowed because earnings season is almost over. However, estimates are inching towards the point where earnings beats won’t bring positive growth. 

495 S&P 500 firms have reported earnings and 63% had their Q1 estimates lowered. The estimated change was -3.87% which is the biggest decline in 3 years. Estimates fell 4.8% in Q1 2016. That was the weakest part of the 2015-2016 earnings recession.

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Earnings estimate data from FactSet is much worse. FactSet shows the consensus is for -3.4% earnings growth. If you follow that estimate, it’s unlikely earnings will grow in Q1. Information technology is expected to see a 10.6% decline in year over year earnings. Software companies are doing well, but semiconductors are doing horribly. 

Even with this weakness, FactSet shows revenue growth will be 4.9% in Q1. We’re used to seeing revenue growth being lower than EPS growth, but the comps for earnings growth are very high in the first 3 quarters.

Since earnings growth is worse than revenue growth and international firms are worse than domestic firms, it’s not a surprise that firms with less than 50% of their sales in America are expected to see an 11.2% decline in EPS. On the other hand, revenue growth is expected to be 6.5% for firms with more than 50% of revenues inside America.

Retail Sales Improve - Bounce Back Moderately

The retail sales report was terrible in December. Those numbers were revised down as monthly headline sales fell 1.6% instead of 1.2%. Retail sales without autos fell 2.1% instead of 1.8%. Without autos and gas, sales fell 1.6% instead of 1.4%. The control group had sales of -2.3% instead of -1.7%.

On a monthly basis, the retail sales report for January looks fantastic, but that’s up against weak comps. It wasn’t amazing on a yearly basis. Headline monthly sales growth was 0.2% which doubled estimates. Retail sales growth without autos was 0.9% which tripled estimates. 

Excluding autos and gas sales growth was 1.2% which doubled the consensus. Finally, as you can see from the chart below, sales from the control group were up 1.1% monthly which beat estimates for 0.7% growth.

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Retail Sales Improve - Weather and seasonal adjustments probably play a role in these volatile monthly results. 

Auto sales brought down the headline growth rate in January. Auto delinquencies are rising, so I don’t expect sales to be strong in 2019. General merchandise sales were up 0.8% after declining 1.5% in December. Non-store sales growth was 2.6% in January after falling 5% in December which was shocking considering the consistent outperformance of online sales.

Online sales were 9.8% of retail sales as of Q3. Even with the weakness in December, I expect their share to reach the double digits in Q4. As I mentioned, on a yearly basis retail sales growth wasn’t great. Advanced yearly retail sales excluding food services were up 1.9% in January after increasing 1.2% in December. 

Besides the very early post-recession period, the weakest yearly growth was 1% in April 2015. There needs to be more improvement to support GDP growth in 2019.

Retail Sales Improve - Conclusion

The 5-day decline ended. Retail sales weren’t as terrible in January as they were in December. Both those points should be a shock to no one as stocks won’t fall every day and the economy isn’t falling off a cliff, so retail sales shouldn’t plummet. 

The good news about February and March retail sales is consumer confidence improved. The bad news is Redbook same store sales growth has been falling and February auto sales were weak.