U.S. Consumers Stir to Life, Shaking Off Winter Slumber
Consumer sentiment also continued to show improvement. Following a plunge in February that suggests there was more to that month’s retail sales weakness than just the weather, the University of Michigan’s survey of consumer sentiment has climbed steadily since, including Friday’s preliminary reading for May. The survey remains just below its high for the year reached in January, the highest reading in thirteen years. Inflationary pressures also eased last month, leaving a little more spending power in consumers’ pockets and suggesting that consumption in real terms may be stronger than it appears, despite still only modest wage growth. The year-over-year increase in the Consumer Price Index (CPI) for April slipped to 2.2 percent from 2.4 percent in March. The core rate dipped to 1.9 from 2.0 percent. The yield on the ten-year Treasury note fell to 2.32 percent at week’s end, after hitting a recent high of 2.41 percent on Wednesday, choosing to overlook the higher prices at the wholesale level reported on Thursday. The two-year yield fell to 1.29 percent from a mid-week high of 1.35.
Despite improving economic data, stocks and earnings show mixed results
Despite the relatively good consumer news, and after reaching a new closing high on Wednesday, stocks drifted lower to end the week, pushing the S&P 500 to its first weekly loss in the past four. The decline was modest, just 0.4 percent, but disappointing that stocks declined at all in light of improving economic data and continued strong earnings. With 91 percent of companies having reported, FactSet now estimates first quarter earnings growth of 13.6 percent, as expectations have been consistently exceeded.[i] But shares of department stores were notably weak as sales continued to decline in the face of growing competition online. And investors were forced to consider the impact on policy of the President’s firing of FBI Director Comey. At the very least, it is a distraction that could delay consideration of economic initiatives including health care, tax reform and next year’s budget.
After starting the year at a forward P/E ratio of 17X, the forward valuation of the S&P 500 rose to 17.9X by early March as the market climbed. Since then, the better than expected earnings growth in the first quarter has lowered the forward P/E to 17.5X, as the index has treaded water. That valuation is still elevated relative to history, but the picture has improved slightly.
There was some modestly encouraging news last week in the oil patch. The U.S. Energy Information Administration (EIA) reported that commercial crude oil inventories declined by a considerable 5.2 million barrels in the week ended May 5. It was the fifth straight weekly fall in crude inventories that has resulted in an overall decline of 2.4 percent. Gasoline inventories also fell. After starting the year at just under $54 a barrel, the price of WTI crude bottomed on May 4 at $45.50 in the face of rising domestic production and bloated inventories. Since then it has rallied modestly, ending last week at $47.84. Yet, despite strong first quarter earnings, and not withstanding last week’s 0.7 percent gain, the sector has languished with the Energy Select Sector Index falling 10 percent on the year.
To start the week, all eyes will be on China which reports April results for retail sales, industrial production, and fixed investment. In the U.S., the calendar this week also includes industrial production, along with housing starts and permits, and leading indicators.
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University of Michigan Consumer Sentiment Survey is a rotating panel survey based on a nationally representative sample that gives each household in the coterminous U.S. an equal probability of being selected. Interviews are conducted throughout the month by telephone. The minimum monthly change required for significance at the 95% level in the Sentiment Index is 4.8 points; for Current and Expectations Index the minimum is 6.0 points.
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
West Texas Intermediate (WTI) is a grade of crude oil commonly used as a benchmark for oil prices. WTI is a light grade with low density and sulfur content.
Energy Select Sector Index: This index, ticker IXE, tracks companies in the following industries: oil, gas and consumable fuels, and energy equipment and services.
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 FactSet Earnings Insights, https://insight.factset.com/
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