The Bulls Need To Stop With The Excuses

|
Includes: DIA, QQQ, SPY
by: Scout Finance

Summary

Q1 GDP was 0.5% even though the BEA changed the estimate method to make Q1 look better.

The labor market weakened because profits weakened, not because of one-time events.

Retail sales are weakening because the consumer is weakening, not because of Amazon.

It seems as if every negative economic result is met with an excuse from the bulls. The weak GDP report showing just 0.5% growth was met with the excuse that Q1 reports always show weakness even as the BEA specifically changed the way it calculated GDP to make sure the first quarter numbers look better.

Recently we have seen weakness in the labor statistics as the NFP showed 160,000 jobs grown in April and the past three jobless claims data points have been increasing. As you can see from the chart, jobless claims are at a one year high as they increased 20,000 from the previous week to 294,000 which is just below the important 300,000 level. Now CNBC is running a story which says that jobless claims are weak because of the strike at Verizon (NYSE:VZ) and the summer break in NYC schools. The list of possible excuses is endless, but the bulls are missing the forest for the tree. The real reason why the labor market is weak is the cycle is turning.

The chart below describes my point about the weakness in the cycle. S&P 500 profits are down 8.5% in Q1 marking the 4th consecutive quarter of earnings declines. As you can see, the corporate profit cycle is a leading indicator for the labor market because firms have to cut costs when their profits start to decline. The chart shows one of the largest divergences between profits and jobs in the past 45 years. This is the catalyst for the labor market to weaken further.

Click to enlarge

Another excuse bulls tell is that all of the weakness in retail sales is caused by Amazon (NASDAQ:AMZN) taking share. While this is partially true, it does not explain away the weakness the consumer is showing. Consumer sentiment peaked in 2015 and hasn't rebounded even with lower oil prices. Therefore, it makes sense that retailers would start to see weakness in this part of the cycle.

Online sales represented 7.5% of total retail sales on an adjusted basis in the fourth quarter of 2015. Amazon represented 39.3% of retail sales in the peak of the season. This means Amazon represents about 3% of total retail sales. Even though it is growing at a faster clip (20.5% in Q1), it doesn't make up for the broad based weakness in retail sales. The latest results have come from Nordstrom (NYSE:JWN) which saw a 1.7% decline in comp store sales and Kohl's (NYSE:KSS) which saw comps decline 3.9%. This is on top of weakness from Gap (NYSE:GPS), L Brands (NYSE:LB), and Macy's (NYSE:M). If almost every single retailer shows weakness, the strength in Amazon cannot make up for these losses. What I expect to occur is even Amazon's sales to be dragged down in this weak environment. Amazon will still outperform and take share points, but it cannot avoid the wrath of the recession. I'm expecting Amazon to point out macro headwinds within the next two quarters.

Conclusion

My conclusion is that the bulls' excuses don't hold water. Q1 GDP weakness, the labor market weakness, and the retail sales weakness cannot be explained away as one-time events. They are weak because the cycle is rolling over as we enter a recession in the middle-end of this year.

Disclosure: I am/we are short AMZN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.