As earnings season shifts into high gear, investors may be able to glean important clues about the health, activity, and preferences of the consumer in this Wednesday's release of March retail sales data.
Consumer activity represents nearly 70% of U.S. gross domestic product (GDP), and "As goes the consumer, so goes the economy," says Sam Stovall, managing director at S&P Global Market Intelligence. "We see 2016 GDP at 2.3%, with consumer spending up 2.8% in 2016. The consumer will be supporting and propelling this economy forward," Stovall says.
The Briefing.com consensus forecasts a 0.1% increase in March retail sales, following a 0.1% decline in February. Retail sales excluding autos are expected to jump 0.4%, following a 0.1% decline in the previous month. The report is scheduled for release at 8:30 a.m. ET Wednesday.
Wind Still At Consumers' Backs
The overall macro-environment remains positive for the consumer, Stovall says. He highlights several bullish factors:
- More jobs: "The unemployment rate is expected to fall to 4.5% in 2017, after averaging 4.8% this year.”
- Higher income: "We see wage growth topping 3% this year, while the core Consumer Price Index [CPI] remains around 2%. That means consumers can keep more of their pay after inflation."
- Cheap gas: Although gasoline prices at the pump have edged up modestly in recent weeks, the national average for a gallon of gas stands at $2.04, which is still 34.9 cents lower than year-ago figures, according to Gasbuddy.com. "Lower gas prices support consumer confidence,” Stovall says.
- Low interest rates: Last but not least, Stovall points to a still ultra-low interest rate environment as a supportive backdrop for consumer spending and borrowing.
Consumer Discretionary Q1 Earnings Seen Strong
The consumer discretionary sector, which includes auto stocks, home builders, retailers, and more, is nearly flat on the year, with a 0.4% decline through April 8, versus a 0.2% gain for the S&P 500. From an earnings growth perspective, however, consumer discretionary stocks are set to shine, Stovall says. "This sector is expected to show the greatest earnings growth in the first quarter at 11.4% versus a decline of 8.1% in the S&P 500 overall,” Stovall says. “This is where earnings growth is expected to be strongest."
In addition, the price/earnings (P/E) ratio on the consumer discretionary sector currently trades at a 4% discount to its long-term average, Stovall says.
Sales Report as Barometer for Retail Stocks
Traders can use the monthly retail sales report as a high-level look or barometer to measure the health of the economy and as a reference point for trading retail stocks, says JJ Kinahan, chief strategist at TD Ameritrade. "Use the overall number and ask, do I believe the individual names I'm trading are better or worse than the level of retail sales?" Kinahan says.
Brick-and-mortar retail stores such as Best Buy, Target, and Abercrombie & Fitch have had a "nice resurgence in 2016 despite a tough economy," Kinahan says. Can this continue? What are the expectations going into earnings?
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