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By HaleStewart July 16, 2017 10:29 am
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US Equity and Economic Week in Review: Stronger Markets But Some Data Weakness

    This week’s news was mixed: retail sales were weak while industrial production rose.  And on the bullish side, the markets rebounded.  But as I noted in this week’s bond market column, there is an increasing breadth to the sluggish data.  The weakness hasn’t filtered into the long-leading and leading data yet, but that doesn’t mean we’re not seeing it.

     Retail sales decreased .2% and have been weak or declined in 7 of the last 13 months:

And the results of the sub-categories are concerning:

Sales at food and beverage stores (top chart) have declined or grown slightly in 7 of the last 13 months.  General store sales (middle chart) have dropped or barely grown in 9 of the last 13 months.  And motor sales (bottom chart) have declined in 4 of the 13 months.  These totals indicate consumer spending is weaker than thought.  They are also lower than totals implied by Federal Reserve projections.

     In contrast, industrial production was up .4%. 

As has been typical of this expansion, growth in materials (read, oil extraction) was the primary reason for growth among major market groups.  As for other sub-categories growth in utilities has been weak while we’ve seen moderate growth in manufacturing and mining.

       This week’s news focused on two important coincident indicators.  Here’s a chart of the five major coincident numbers:

Payrolls and personal income continue to expand.  Industrial production is rising again after a lull caused by weak oil prices.  But real retail sales (teal) along with manufacturing sales (darker blue) are slightly weaker.  The former’s weakness is documented above.  The latter topped at the end of last year and has trended slightly lower since.  The data hasn’t been updated for a few months, so it’s possible we’ll see a rebound.  But overall data is still pointing to some underlying softness.

     Economic conclusion: in general, the economy is in decent shape.  But for the last 6-9 months, we’ve seen pockets of weakness emerge.  Auto sales are off slightly.  Industrial production is heavily dependent on oil extraction for growth.  Personal consumption expenditures could be stronger.  Add to that the overall weak situation with prices, slow wage growth and now topline weakness in retail sales.  The areas of softness are starting to expand a bit.   

     Market Overview: There are two pieces of good news this week. First, the SPYs and QQQs rebounded, moving back through their respective longer-term trend lines:

Second, earnings news, although early, is positive:

The blended sales growth rate for the second quarter is 4.8% today, which is equal to the sales growth rate of 4.8% last week. During the past week, upside sales surprises reported by companies in the Financials sector were mainly offset by downward revisions to sales estimates for companies in the Energy sector, resulting in no change in the revenue growth rate for the index. Overall, ten sectors are reporting or are projected to report year-over-year growth in revenues, led by the Energy sector. The only sector predicted to report a year-over-year decline in revenues is the Telecom Services sector.

But as has been the case for the last 18-24 months, the market is still expensive.  So even a strong earnings season will likely have little topside impact. 


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