This Is The Hottest Sector Of The Market And It May Just Be Getting Started

Very different messages were appeared to be sent by two signals about the strength of consumer spending in the United States.

While on one hand, the consumer spending figure reported Friday was quite weak, with the Bureau of Economic Analysis announcing that personal consumption declined quarter over quarter in its advance estimate of first-quarter economic growth, on the other hand, the consumer discretionary sector was the best-performing sector in April (and the second-best sector year to date).

Samuel Rines, senior economist and portfolio strategist at Avalon Advisors said that by separating the report’s real, inflation-adjusted consumer spending figure from companies’ earnings within the consumer discretionary sector, this seemingly crisscrossing message can be explained.

While companies report earnings on nominal sales — and retailers’ sales have improved year over year even as sentiment around the group is rather negative, Friday’s report showed the consumer slowed in inflation-adjusted terms, Rines told the media.

“The first quarter was not outstanding for retail sales in general, but the Census Bureau’s monthly retail sales report shows sales (without adjusting for inflation) gaining about 5 percent from a year ago,” Rines said.

According to Erin Gibbs, equity chief investment officer at S&P Global, earnings are indeed expected to pick up.

Gibbs said on Friday that as earnings are expected to improve for the sector, consumer discretionary stocks as a whole should see a “significant ramp up” throughout the rest of the year. Furthermore, for the month of April alone, from 20 times forward earnings to 20.6 forward earnings, there has been a rise in the sector’s valuations.

“I see this as a sign of investors looking ahead and more promising return for later in 2017,” Gibbs said.

With online retail giant Amazon being the most prominent, a few stocks have had outsized effects on the sector this year, shows the data if digging is done one level deeper. Among other big contributors are Home Depot and Concast (parent company of NBCUniversal and CNBC).

Miller Tabak equity strategist Matt Maley noted that the sector could benefit from rising real wage growth.

“Real average hourly earnings have actually been coming down for the last two years, but in March they bounced nicely. If that bounce can continue, that should bode very well for consumer spending,” because they are highly correlated.

Reflection of the weakest paced growth in three years for the U.S. economy was reflected in the headline GDP figure released on Friday.

With a return to the trend in the second quarter of around 2 percent as inflation pressures abate, the first quarter’s reported consumption figure could rise to 0.5 percent as Rines said he expects a slight upward revision to that figure which was noted at 0.3 percent.

(Adapted from CNBC)

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Categories: Economy & Finance, Uncategorized

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