This morning, the U.S. Census Bureau released its advance monthly sales for retail and food services for April, a report that many hoped would increase confidence that the lackluster economic growth in the first quarter could be blamed on the weather and port closures by showing a robust rebound in consumer spending last month. Those hopes were dashed as retail sales for April were flat, versus expectations for 0.2% growth.
Core sales -- which exclude cars, gasoline, building materials and food services -- were also unchanged, versus expectations of an 0.5% increase. Overall, retail sales have grown 0.9% during the past year, which is the weakest rate of growth since October 2009. Headline retail sales have now missed expectations for five consecutive months, the longest losing streak since 2001. The few areas of strength were online sales, up 0.8%, and restaurant and bar sales, up 0.7%. Although according to Friday's Bureau of Labor Statistics jobs report, average hourly earnings for all employees have increased by 2.2% during the past year, it looks like most people aren't looking to immediately spend any additional income or what they have saved from lower gas prices.
So what's going on? First-quarter gross domestic product is likely to get revised down into contraction territory as the ever important consumer is still pinching pennies. We were told that low interest rates would get things moving, and yet if low rates were the panacea, then the housing market should have picked up by now. To us, it all gets back to job creation, wage growth and confidence that things are actually getting better, not just that we are told that is happening.
Government spending was also supposed to help get the economy back on its feet. At the end of 2007, the U.S. federal debt was $9.2 trillion; today, it's more than $18 trillion. Yes, incredibly enough the U.S. government ran deficits during the past seven years equal to those for all the prior 230 years combined. That's a hell of a lot of spending, and still no boom after the bust. Europe and Japan have also added a mountain of debt, and most global policy makers have turned over the keys to central banks, so much so that at the recent Strategic Investment Conference presented by Altegris Advisors in San Diego, nary a presenter failed to drop the F-bomb (Fed in this case) at least once during their presentations. As Grant Williams pointed out, "Central banks are the single most important factor in every investment decision. That's ridiculous!" We tend to agree, but it is today's reality, and so as investors, we'd best pay attention. Quantitative easing appears to be the last hope for many.
Out on Main Street, things are still tough for small businesses. Small-business optimism, according to the National Federation of Independent Businesses, is still below the historical average and many owners are still wary of the future.
In the U.S., the cost of labor is getting complicated. Worker compensation demands have been rising, while productivity has been falling and businesses find themselves struggling with pricing.
That looks like compressing margins to us.
On Wall Street, almost 2,400 companies have posted earnings since the first-quarter reporting period began. Of those, 60% have beaten earnings-per-share estimates, while 49% have beaten revenue forecasts. Earning beats are in line with historical norms, but the revenue beats are about 10% below the average. So much like Main Street, those reporting to Wall Street are also having a tough time with the top line, and have driven EPS improvements primarily through cost cutting and share buybacks, as we've mentioned many times before. U.S. stock-price improvements have been driven by rising price-to-earnings ratios, and so to be overweight with U.S. equities, you need to believe that either P-Es will continue to expand or profits will improve. We say that because at some point cost-cutting initiatives will be depleted and companies will exhaust buyback authorizations.
P-E expansion so far has been driven in large part by central-bank liquidity and tightening spreads, which look to be more behind than in front of us, and with the economy still struggling to get stable footing, solid earnings growth across the board will be tough. Even before adjusting for buybacks, consensus expectations call for S&P 500 earnings to rise only 2% this year from 2014.
We think the recent stock-price whoopings delivered to companies such as Wynn Resorts (WYNN), LinkedIn (LNKD) and Twitter (TWTR) attest to just how volatile things can get when expectations aren't met. Then there's the head scratcher, Etsy, (ETSY), which is down by nearly a third from its opening day, less than a month ago. Who exactly thought this one made sense at $30/share? Hawkins, you know very well that we didn't,
Across the pond, while the European Central Bank's quantitative easing hasn't exactly ensured the low interest rates expected, the European bloc is now growing faster than the U.S. for the first time since 2011, expanding by 0.4% in the first quarter, but still shy of expectations of 0.5% growth. Growth was driven surprisingly by Italy, France and Spain, which were up 0.3%, 0.7% and 0.9%, respectively, with Germany missing expectations with a disappointing 0.3% growth in the first quarter.
What does all this mean for the investor? In the U.S., it is increasingly about specific stock selection. Picks need to take advantage of longer-term trends and to take into account the demographic and economic obstacles facing the country. Fewer people are working, more people are getting benefits, and businesses face more regulations. With the likelihood for increased volatility and potential stock market wobbles as the Fed looks to raise rates, weaknesses should be viewed as buying opportunities while investors might want to consider a longer-term perspective.
Companies such as Qualcomm (QCOM), which took a bit of a hit this year, fit our long-term outlook for the expanding mobile world. United Natural Foods (UNFI) reflects consumers shifting focus toward health and longevity as more grocery chains look to compete with Whole Foods Market (WFM). As we take in more data thanks to shifting preferences for streaming, social media, and cloud computing, we see demand improving for Cavium Networks (CAVM), particularly as Cisco Systems (CSCO) tackles broadband speeds with new products.
In contrast, as Europe is still getting is latest QE groove on, index investing there will likely be more productive than back home. Today's GDP reports served to increase our interest in iShares MSCI Spain Capped Index (EWP), iShares MSCI Italy Capped Index (EWI) and iShares MSCI France Index (EWQ).