The Daily Dose: Too Much Unfounded Optimism

 | May 28, 2014 | 10:00 AM EDT
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The stock market is fueled by both perception and reality. Perception runs in advance of reality -- and, right now, I would say stocks are continuing to trek higher due to perception of a forthcoming U.S. demand boom this holiday season. Whether that will ultimately become truth is anyone's guess, though if it does, it will obviously materialize in the third quarter and affect a wide variety of companies. Recent macroeconomic data points do indeed suggest the economy is building the type of sustainable momentum that should be able to shake off initial effects of stimulus tapering by the Federal Reserve.

However, I feel many investors are failing to recognize the lasting black cloud of the Great Recession. That cloud hangs over the managers of many companies across various industries, as well as in the numbers being produced by the economy. For example, the rising adoption of mobile consumption, and Amazon's (AMZN) capital investments, are widely perceived as killing American retail institutions. Certainly that is a large part of the story, but it's the entire tale by any means.

You see, U.S. households are simply not as many consuming goods, nor with the same frequency, as they did in years past. It almost seems that there's a negative structural component to the post-recession economy that will continue to hamper recovery efforts.

On the chart below, you can see the latest on consumer sentiment. The market cheered the May reading, which came in above consensus and showed improvement from the prior month. Since November 2013, the trend has been nicely higher.

Consumer Sentiment

Source: Bloomberg

Source: Bloomberg

That trend has corresponded to a general rise in personal income, as seen in the chart below.

Personal Income Growth

Source: Bloomberg

Source: Bloomberg

Unfortunately, these positive aspects of the economy, which Mr. Market is lapping up, are not translating into stronger retail sales. Not only has retail-sales growth begun to moderate from earlier in the economic recovery, but the pace remains on a long-term downtrend that dates back to 1998.

Retail Sales Growth

Source: MacroTrends

Source: MacroTrends

So what does this reality generate when it meets unfounded exuberance in the marketplace? Well, it creates stock routs, as is currently the case throughout the retail sector amid this never-ending earnings season. The selloffs have been so severe, and in some instances the financials are so surprisingly dour -- as in those numbers on Staples (SPLS) -- that one really has to question whether hours of research are worthwhile until valuations have become rock-bottom indeed.

In fact, I had a rare miscalculation on Dick's Sporting Goods (DKS), a function of a wacky post-recession recovery that is causing golfers to question their need to upgrade equipment every season.

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