Market Sentiment Neutral

It’s worth reviewing the market sentiment because we are in an uncertain moment in the near term for the stock market. The S&P 500 was able to exit the streak of lower lows. By doing this, it became fairly overbought in the past week. The hope was that this rally wouldn’t fade so easily because that would reinforce the notion that the market will remain stuck in this range for an extended period.

The table below shows a few sentiment indicators. The VIX, put to call ratios, AAII survey, Investor's Intelligence survey, NAAIM, and the Ned Davis sentiment poll all show the sentiment is neutral. The stock market is in quick sand as the great earnings results can no longer justify the market ignoring the global economic weakness especially in Europe. While America could gain investment capital at the expense of other advanced markets, it’s still not good for S&P 500 earnings for Europe to be weak as it is a big market for many internationally focused firms.

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The chart below, which shows the Investors Intelligence ratio, contextualizes the period we are in now. The market went from being extremely extended in January, as there was record bullishness, to being modestly oversold as bearishness became more popular. The bearishness never hit the levels seen in 2008 and 2016, so the rebound from it hasn’t provide much momentum for stocks, which is why we are stuck in the current range. You don’t want to sell stocks when they are oversold since we just witnessed a great earnings season. However, it’s a fool’s game to bet on the sentiment reaching another record high. Stocks need improved fundamentals to get back to the levels seen in January.

The 18 PE multiple in January shows there was froth in the market. It takes time for the fundamentals to catch up to stocks. There needs to be verification of the high GDP growth rate expected in Q2. It’s a weird situation where the GDP consensus is very optimistic, but there’s not much data to back it up. Furthermore, I don’t think the stock market believes GDP growth will be above 3%. If investors were certain GDP growth will accelerate to between 3% and 3.5% in Q2, the market would be near the January high. There’s a lot of data which needs to come through to support that expectation.

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Slightly Weak Retail Sales Report

Heading into Tuesday, I stated the April retail sales report would be important to the market. I said that if it beat estimates, stocks would continue their recent mini uptrend. As of the writing of this post, the market hasn’t closed, but it’s clearly in the red. The retail sales report came in slightly weaker than expected on some metrics, so I wasn’t wrong. Obviously, one day of action isn’t as important as the medium term trend, so let’s look at the details of the report to see where this leaves the market fundamentally speaking.

As you can see from the chart below, year over year retail sales were up 4.7% which is a slight deceleration from last month, but a decent result. As you can see from the blue bars, month over month retail sales growth was 0.3% which met expectations. The good news is the prior month was revised from 0.6% growth to 0.8% growth. Excluding autos, growth was 0.3% which missed estimates for 0.5%. This was another deceleration from last month which was revised higher from 0.2% growth to 0.4% growth.

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Retail sales without gas and autos were up 0.3% which missed estimates for 0.4%. This is important because gas prices have been rising. It shows how retail sales outside of gasoline have been affected by the rising prices. On the point of rising oil prices, on Tuesday the difference between Brent and WTI increased to $8 as fracking production slows the price increases domestically, but not as much abroad. Finally, the control group saw 0.4% growth which met expectations and was one tenth below last month’s growth which was revised higher by one tenth. This improvement to the control group growth in March could lead to an upward revision in Q1 GDP growth.

Specifically, vehicle sales were up 0.1% which is a pretty good result because they were up 2.1% last month. Gas sales were up 0.8% because of the price increases which have pushed the price per gallon to nearly $3. Restaurant sales fell 0.3% month over month which is a sign the consumer isn’t doing well. They are also sensitive to rising gas prices, so that could be an issue going forward.

Online retail sales were up 0.6%. I have mentioned that rising gas prices could be good for online sales as people don’t want to spend money on gas by driving to the store. The increased cost of shipping won’t hurt consumers who have Amazon Prime; it will hurt Amazon. The firm could raise the price of Prime if oil stays high but given the fact that it just raised the subscription price, that’s unlikely in the next few months. I have little doubt that online sales will crack the double digits as a percentage of total retail sales in the intermediate term, possibly by the end of this year (9.1% as of Q4 2017).

Q2 GDP Estimates Are Very High

In terms of reviewing the economy to see if there is improvement in consumer spending, this retail sales report wasn’t great. However, it wasn’t bad in terms of the GDP calculation because the control group numbers are the results directly plugged into GDP. That stat met estimates and was only down one tenth from last month. As a result of this report, the GDP Nowcast for Q2 was up from 4% to 4.1% as you can see in the chart below. The Atlanta Fed’s forecast usually dips at this point in the quarter, so this is good news. Specifically, the personal consumption expenditures growth estimate was revised higher from 3% to 3.1%. Last quarter was weak for real consumer spending, so it’s the metric I’m watching the closest. As you can also see, the blue chip forecast is up to 3.2% as analysts are very optimistic about this quarter. The CNBC tracking estimate has the average forecast at 3.6% which is closer to the Atlanta Fed model’s expectation.

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