By Parke Shall
This morning's retail numbers showed some promise; at least compared to the last few months. But we don't want the market to get ahead of itself and think that it's all good news and smooth sailing. While today's numbers were encouraging, you certainly can't make a pattern out of one month.
Let's also not forget that in these times, the market spins good news to actually be bad news for equities based on the fact that they may accelerate rate hikes. Macro economic numbers have become a real lose/lose scenario of sorts. Either the number is impressive and equities sell offon rate hike fears, or the number misses and equities sell off on the poor indication.
This data continues to come in during a time that we think continues to feel "toppy". Today's news that Greek talks had once again broken down have capped the follow up run to Wednesday's bullish day. But zooming out from that picture, it's clear that the Dow has had real trouble holding 18,000.
^DJI data by YCharts
It was reported on Thursday morning that May's retail numbers grew on the back of households purchasing vehicles and other discretionary goods, even though the price of gas seems to have finally bottomed and stabilized.
Confusion was abound in retail reports dating back to the beginning of 2015, as lower gas prices should have been a catalyst to increased retail spending. What we saw, however, was nothing really of the sort.
Brent Crude Oil Spot Price data by YCharts
Retail sales increased 1.2% in May, beating analysts' estimates who had forecast sales growing 1.1%. April was also revised upward 0.2% versus an estimate of it not being revised (unchanged). On top of that, March's numbers were also revised to 1.5% from 1.1%.
This ends a string of tough retail numbers which we have documented every month for the majority of 2015 thus far. While the upward revisions and May's beat are promising, it's hardly the time for us to get bullish on retail as a sector. Nor do we feel it's time to pile into equities.
On Thursday morning, equity futures held their gains after the numbers were released, despite positive data seeming to have a "reverse effect" - meaning when good data comes in, the market fears that it'll lead to rates rising.
CNBC broke down the itemized list of retail segments and their corresponding performance:
- Retail sales excluding automobiles, gasoline, building materials and food services increased 0.7 percent last month after an upwardly revised 0.1 percent rise in April.
- The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast core retail sales rising 0.5 percent in May after they were previously reported to have been flat in April.
- Consumer spending is likely to remain fairly strong in the coming months, supported by high savings, rising house prices and a tightening labor market.
- Overall retail sales last month were buoyed by a 2.0 percent jump in receipts at auto dealerships. Sales at service stations rose 3.7 percent, reflecting a rise in gasoline prices. Sales at electronic and appliance stores gained 0.1 percent, while receipts at furniture stores increased 0.8 percent.
- Sales at clothing stores surged 1.5 percent. Receipts at online stores climbed 1.4 percent and sales at sporting goods stores increased 0.8 percent. Sales of building materials and garden equipment advanced 2.1 percent.
- Sales at restaurants and bars nudged up 0.1 percent
All the while retail reports have been less than promising in 2015, the Dow 30 Retail Titans index continues to hold at its highs. The move upward can correlate directly to the chart above when Brent began to fall.
^DJTRET data by YCharts
Also worth noting is that our articles on individual companies over the last couple of months have continued to have one underlying theme to them: We think retail is going to continue on the decline as part of a bigger market pullback and shift for consumers moving online.
Separately, we've discussed why we think the rate hike is coming by the end of this year and ways that investors can take advantage of it. We recommended some financials that should benefit from the coming rate hikes, but one thing we didn't talk about are sectors that we would avoid. Retail is an obvious candidate for moving out of as investments when rates start to rise. As rates go up, payments on credit will begin to rise too. As that happens, the consumer all of a sudden has bigger payments to make, less inclination to borrow more, and less disposable income to spend on "wants" instead of "needs." Retail, we believe, will be one of the categories hit hard.
Again, today's number shows us that the market could be approaching a ceiling. We're interested in how retail comes in throughout the summer, and we'll be logging these numbers to keep on top of the sector's trend.
We are looking at retail through a broad lens and an eagle eye view. As we've continued to state, a rate rise is coming eventually and we think there's going to be a further slowdown in discretionary spending, which should also help to slow retail spending.
We don't recommend owning retail stocks here unless the company is online-based or has a fully implemented in-store/online hybrid model already in play. We haven't seen too many of these.
Again it's important to remember that the cost of capital is going to rise when rates do, which will be bad news for companies that need to tap the capital markets regularly or are already carrying debt.
We think today's numbers don't disprove our cautious outlook on the market and on retail as a sector.
Let's see how the next few months go; we remain cautious.
We will revisit this argument in the future as more data becomes available.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.