Credit Conditions & Retails Sales
We have seen credit standards tightening over the last few years, but demand was mostly unaffected. However, during Q1 2019 we saw data published showing a significant drop in consumer demand. The demand data for credit card loans and other consumer loans were the weakest seen in almost a decade.
Given tightening loan standards and weaker credit demand, weaker retail sales growth would certainly not come as a surprise. However, monthly U.S. retail sales fell by 1.2% in December from the prior month, which is the weakest monthly change in 9 years.
Figure 3 - Source: TradingEconomics
Corporate Earnings & Investments
We have also seen earnings estimates for the S&P 500 decrease significantly over the last few months. The earnings estimate for Q1 2019 has now turned negative.
Figure 4 - Source: Jesse Felder on Twitter
Another less than encouraging sign for the future is that fund managers are asking for improved balance sheets over returning cash to shareholder or increasing capex. Given the amount of corporate leverage in the market, I agree that improving the balance sheet is important. However, can the market really go unaffected if companies head the advice and start deleveraging?
Figure 5 - Source: Holger Zschaepitz on Twitter
The Atlanta Fed did earlier in the week drop the Q4 2018 GDP estimated growth to 1.5% from 2.7% following the weak retail sales number. It is interesting to note that the overall stock and corporate credit spreads seemed completely unaffected by the weaker economic data.
Figure 6 - Source: YCharts
Given the government shutdown and cold weather in Q1 2019, GDP growth in the first quarter of 2019 could also come in on the weak side.
It seems like the market is expecting the Fed to save the day, because the price action would otherwise make little sense. I do think Jerome Powell and the Fed will act very similarly to what we have seen the Fed do over the last few decades.
However, I highly doubt the Fed will stop quantitative tightening or start lowering interest rates unless we see some distress in either the equity or credit markets, which would likely imply lower equity prices first.
Given the rebound in equities and the weaker economic data, I think decreasing the overall market risk would be the prudent approach for the long only investor. For the long/short investor, increasing some short positions would decrease the risk at a point in time when the market seems a bit detached from the economic reality.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.