E Bull Market Carries On, But It Hasn't Carried Everything With It

September 29, 2017 will mark the final trading day of the Q3 2017 period and with that may come some significant rebalancing in the asset management community. So if you were hoping for a little volatility to shake things up in the near-term you may just get it by month’s end. And with the end of the quarter on the horizon we’ll be heading straight into the Q3 earning’s reporting season.

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After double-digit Q1 and Q2 earnings reported already in 2017, Q3 may seem like somewhat of a let down. Q1 earnings growth was a spectacular 13.6% and met with earnings growth of 11.1% in the Q2 2017 period. As of right now, earnings are only expected to grow some 3.3% on revenue growth of 5% for the Q3 2017 period. Q3 earnings estimates have come way down and are forecasted to come in lower than 2016’s 4% earnings growth. This is in part due to seasonality and Hurricane Harvey. But estimates are rarely accurate and will likely find earnings growth higher than present estimates. That has been the trend at least.    

The S&P 500 closed at a record level of 2,500.23 on September 15, 2017. This record has not been without its fare share of fits and starts, but it has been without a 3% pullback in quite some time. In fact it has been exactly 10 months since the last 3% pullback in the S&P 500. The only time in recorded history that beats the current trend of the S&P 500 not pulling back 3% would be from 1994 to December 1995. Goes to show how different a time period we are in what with quants, algorithms and ETF investing. For all the value assumed in historic rendering/modeling that asset managers employ, it’s extremely difficult to model for the future as the investing landscape and tools for which to invest have changed over the last decade or so. That difficulty breeds discontent and is, in part, one of the reasons why people say this is the most unloved bull market in history. “It’s over extended, unhealthy and found wanting for a correction of sorts”, but will that correction come or not remains to be seen. 

The broader market and investing landscape is not the only thing to have been found changing over the last decade or so. The consumer and retail landscape has also been undergoing a seismic shift. Where once malls and brick & mortar shops were the hub of retail consumption that is becoming a thing of the past. Malls are less and less trafficked with each passing quarter as consumers give way more and more to e-commerce consumption or experiential consumption. Retail brands like Macy’s (M), J.C. Penney (JCP), Target (TGT), Kohl’s (KSS), Dillard’s (DDS) and so many more traditional retailers have witnessed and continue to witness hardships from this seismic shift in the retail climate. The number of brick & mortar retail store closings will surpass the level of store closing from the Financial Crisis period. On 9/19/17 after the closing bell, we may officially hear how many stores Bed Bath & Beyond (BBBY) plans to shutter as the company reports its quarterly results. I’ve long since warned investors about the deteriorating gross margins from the retail operator and am hoping that some restructuring of the business operation can find investors near-term relief. Maybe even the CEO steps aside as he has largely led the retailer into this steep decline without bringing about meaningful changes along the way. 

The retailers are largely “no-touch” investment vehicles at this point. By that I do indeed mean they are not long-term investments.  While all the aforementioned brands are attacking the shift to e-commerce retailing with a plethora of initiatives, none of these initiatives are true offsets or have the ability to “overcome” long-term. By and large, the initiatives put forth by these named retailers are Band-Aids and suitable for swing trading and short term investing. Whether it be Target’s 12, new private label brand introductions and focus on pricing or J.C. Penney’s dive into appliances and build out of Sephora, these are temporary solutions to an irreparable problem. The problem is quite simply exampled by understanding the following with respect to brick & mortar vs. e-commerce retail spending shift: Imagine you have 2 cups in front of you, one that is filled completely to the top with water and the other having only been filled some 9% with water. That is brick & mortar retail spending compared with e-commerce retail spending. Brick & mortar retail has seemingly peaked and filled its glass to the limit over the many decades. Over the last 15 years we have witnessed the syphoning of brick & mortar retail sales flowing to the e-commerce cup. And that pace of syphoning sales has accelerated in recent years with brick & mortar retailers participating with their own brands in the e-commerce spending shift. 

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Disclosure: I am long M for a swing trade and short volatility utilizing VIX-leveraged ETPs

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