Some heavy hitters in corporate America like Goldman Sachs (GS), Citigroup (C) and Bank of America (BAC) report first-quarter earnings this week -- but their three-month performances deserve to take a backseat to a single, government-issued report.
That report is the one for March retail sales.
For the last several months, retail sales in the U.S. have disappointed from two standpoints. The first is outright misses to a Wall Street consensus that was justifiably propped up by the alleged positive impact from the plunge in gas prices and rising consumer confidence. Another has been downward revisions to previous months' data, in not so many words suggesting the U.S. consumers are content with sitting on their savings. Actually, that's precisely what consumers have been doing, saving some 6% of their disposable income even as their income expectations have started to brighten. And this penchant for socking away money is in spite of average households that work in low hourly wage industries receiving well-publicized pay bumps from McDonald's (MCD), Wal-Mart (WMT), Target (TGT) and others.
Yet, there's no discernible new jump in spending for the average U.S. household -- that doesn't fit squarely with the 6.3% relative surge in consumer discretionary stocks year to date. Rather, what it fits well with are full-year earnings warnings issued in mid-February by retail's largest names such as Fossil (FOSL), Wal-Mart, Nordstrom (JWN), TJ Maxx (TJX) and Gap (GPS).
March represented put up or shut up time for U.S. consumers. The weather was friendlier, and deals were out there in apparel land, as retailers marked down merchandise that arrived late due to the West Coast port issue. The problem is that U.S. consumers unlikely tipped their spending intentions for the spring in March -- so another lackluster retail sales report could lead to a pullback in the hot consumer discretionary space.
Here are two charts that keep all of this in perspective:
1. Consumer confidence is strengthening further.
Source: JP Morgan
These levels of consumer confidence (nearing pre-recession highs), supported by lower gas prices and steadily climbing wages, should be translating to more spending in the discretionary aisles of Wal-Mart or a modest weekend splurge in the Nike (NKE) section at J.C. Penney (JCP). Unfortunately, it hasn't thus far, and that's a problem that could begin to weigh on the bull logic on consumer stocks (and derivative trades, like domestic truckers).
2. Income expectations are rising.
Source: JP Morgan
Consumers see their incomes advancing over the next 12 months, but they are not spending (or "levering up" their personal balance sheets) in significant quantities (and consistently) ahead of those fatter bi-weekly paychecks. That's worrisome, and leaves me wondering if consumers have over-reached in the past year or two on a new car or home payment in the rock-bottom interest rate environment.
Now go enjoy that morning read of Goldman Sachs' earnings release. However, remember that for every $550 Apple Watch pre-ordered, with multiple straps boosting the final sales price, that is money that last year could have found its way into the registers of Macy's (M).
I met with Chipotle (CMG) in NYC in March. Came away with a host of interesting information, but nothing that I would deem as a signal for an explosive first-quarter, or a flurry of new initiatives (could see some more modest, yet favorable news on a topic or two soon, however) to be announced. So that's why I am a bit perplexed by the stock's surge late last week on no new news. That said, I think the move in the stock is indicative of a first quarter that may have come in nicely above consensus sales and earnings estimates, both of which were marked lower following the fourth-quarter earnings call.