U.S. Personal Income Growth Outpaces Spending
Personal income increased 0.4% during March (4.2% y/y) following a 0.1% uptick in February, revised from 0.2%. A 0.3% increase had been expected in the Action Economics Forecast Survey. Wages & salaries increased 0.4% (4.7% y/y) following a 0.1% slip. (…)
Disposable personal income increased 0.4% (4.0% y/y) following February’s 0.1% rise. Adjusted for price increases, take-home pay rose 0.3% (3.1% y/y) following 0.2% increases in the prior two months.
Personal consumption expenditures during March increased a minimal 0.1% (3.5% y/y) following two months of 0.2% gain. February’s rise was revised from 0.1%. The latest increase fell short of expectations for a 0.2% rise. Spending on durable goods declined 0.6% (+1.3% y/y), leaving Q1 growth at -2.7% (AR). Motor vehicle & parts purchases fell 2.0% (-4.8% y/y), down for the fourth consecutive month. Spending on furniture & appliances offset this decline with a 0.4% rise (3.1% y/y), while recreational goods & vehicles purchases rose 0.2% (6.1% y/y). Nondurable goods spending advanced 0.6% (0.4% y/y), but quarterly purchases declined 4.7% (AR). Clothing & footwear buying declined 0.5% (+0.3% y/y), but gasoline purchases increased 4.5% with higher prices (-17.6% y/y). Food & beverage purchases rose 0.4% (1.0% y/y). In the services area, outlays rose 0.1% (4.8% y/y), the gain held back by a 0.4% decline (+2.8% y/y) in spending on housing & utilities. Health care outlays rose 0.4% (4.5% y/y) while recreation buying gained 0.3% (8.8% y/y). Spending at restaurants & hotels fell 0.6% (+5.5% y/y).
Adjusted for price inflation, personal consumption expenditures remained constant m/m (2.6% y/y) after a 0.3% increase. During Q1, spending rose at a 1.9% annual rate, the weakest rise in a year.
The personal savings rate held steady at 5.4%, but February’s rate was lessened to 5.1%. January’s rate also was revised down to 5.2%. The Q1 savings rate of 5.2% equaled the level in Q1’15. The level of personal savings rose 12.7% y/y in March.
U.S. Chides Five Economic Powers Over Policies The Obama administration delivered a shot across the bow to Asia’s leading exporters and Germany for their economic policies and warned that a number of major economies around the globe could face intense pressure to engage in currency interventions to counter slow growth.
(…) The U.S. Treasury Department, in its semiannual currency report to Congress, called out China, Japan, South Korea, Taiwan and Germany for relying on policies it says threaten to damage the U.S. and the global economy.
The countries are cited in a new name-and-shame list that can trigger sanctions against offending trade partners under fresh powers Congress granted last year to address economic policies that threaten U.S. industries.
U.S. officials are increasingly concerned other countries aren’t doing enough to boost demand at home, relying too heavily on exports to bolster growth. (…)
Oil prices retreat from 2016 highs on OPEC output boost Oil prices retreated from 2016 highs on Monday as rising production in the Middle East outweighed a decline in U.S. output and a sliding dollar.
Crude production by the Organization of the Petroleum Exporting Countries rose in April to 32.64 million barrels per day (bpd), close to the highest level in recent history.
Russia, the biggest exporter outside OPEC, also increased monthly crude for seaborne exports by more than 7 percent to 3.117 million bpd in April. (…)
The U.S. oil rig count fell for the sixth week last week, which analysts said showed the price of oil had not risen enough to lure shale producers back. (…)
“In a normal economic environment, we will see the price direction is rather upwards than downwards,” IEA Executive Director Fatih Birol said on Sunday during a G7 meeting of energy ministers in Japan.
Non-OPEC output is set to fall by more than 700,000 bpd this year, the biggest decline in around 20 years, he said.
While Morgan Stanley warned that an emerging gasoline glut threatened refinery demand for crude, Birol said the draw in global stockpiles should start toward the end of the year.
At the G7 meeting, U.S. Energy Secretary Ernest Moniz said U.S. oil production would likely fall 600,000 bpd this year from 2015, when output peaked around 9.6 million bpd.
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As oil plows through $45 a barrel, U.S. producers rush to lock in prices U.S. oil producers pounced on this month’s 20 percent rally in crude futures to the highest level since November, locking in better prices for their oil by selling future output and securing an additional lifeline for the years-long downturn.
EARNINGS WATCH
Factset’s weekly summary:
Overall, 62% of the companies in the S&P 500 have reported earnings to date for the first quarter. Of these companies, 74% have reported actual EPS above the mean EPS estimate, 7% have reported actual EPS equal to the mean EPS estimate, and 18% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above both the 1-year (69%) average and the 5-year (67%) average.
In aggregate, companies are reporting earnings that are 4.1% above expectations. This surprise percentage is slightly below both the 1-year (+4.2%) average and the 5-year (+4.2%) average.
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) year-over-year earnings decline for Q1 2016 is -7.6%, which is smaller than the expected earnings decline of -8.7% at the end of the quarter (March 31). Seven sectors are reporting a year-over-year decline in earnings, led by the Energy and Materials sectors. Three sectors are reporting year-over-year growth in earnings, led by the Consumer Discretionary and Telecom Services sectors.
If the Energy sector is excluded, the blended earnings decline for the S&P 500 would improve to -2.4% from -7.6% [-3.6% last week].
In terms of revenues, 55% of companies have reported actual sales above estimated sales and 45% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1-year (50%) average but below the 5-year average (56%).
In aggregate, companies are reporting sales that are 0.2% above expectations. This surprise percentage is below both the 1-year (+0.6%) average and above the 5-year (+0.7%) average.
The blended sales decline for Q1 2016 is -1.3%, which is larger the estimated sales decline of -1.1% at the end of the quarter (March 31). Five sectors are reporting year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are reporting a year-over-year decline in revenues, led by the Energy and Materials sectors.
If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 1.6% from -1.3% [unchanged from last week].
At this point in time, 54 companies in the index have issued EPS guidance for Q2 2016. Of these 54 companies, 36 have issued negative EPS guidance and 18 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (36 out of 54), which is below the 5-year average of 73%.
During the month of April, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 1.8% (to $28.90 from $29.43) during this period. During the past year (4 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.8%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.2%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.3%.
At the sector level, the Information Technology has recorded the largest percentage decline in the bottom-up EPS estimate for Q2 during the first month of the quarter at -9.4% (to $9.06 from $10.01). This sector has also recorded the largest decline in value of all ten sectors over this time frame at -4.6% (to 703.04 from 737.12).
Corporate guidance was 76% negative last week as 26 of the 34 companies issuing Q2 guidance guided down. Negative guidance was mostly prevalent in IT (6), Financials (6) and Industrials (6). Four of the eight positive guidance were from Health Care companies.
Thomson Reuters’ tally now says Q1 EPS will decline 5.7% YoY, from –7.1% On April 1 and –6.1% on April 28. Q2 EPS are seen down 3.0% (-2.9% last week) while Q3 and Q4 are expected up 2.7% and 9.6% respectively (unchanged). Full year EPS are forecast up 0.7% (+0.8% last week).
In all, two-thirds of the way, the earnings season seems unlikely to provide much earnings tailwind until Q3 and, particularly, Q4. Trailing EPS should decline from $117.46 to $116.50 after Q1 and be roughly unchanged after Q2. IF TR’s calculations are met, trailing EPS could rise to $118.40 after Q4, almost a year from now.
The S&P 500 Index continues to hover around the Rule of 20 fair value of 2074 with its weekly close at 2065 or 19.8 on the Rule of 20 scale.
Investors sentiment has moved to neutral per II, in sync with equity markets (via Ed Yardeni)
What’s not in sync is the trend in valuation with economic surprises. The last time we had the same opposite trends was in the first half of 2015…Rising P/Es occur when inflation declines and/or when investor enthusiasm rises which generally feeds off positive economic surprises. Currently, there seems to be scant stuff to lift spirits, investors’ or voters’ for that matter…
Note that the economy has not surprised positively for more than 15 months, an exceptionally long period which speaks volumes about the “surprisingly” weak world economies.
U.S. companies starting to see relief from pains of strong dollar
(…) Companies including Whirlpool Corp, Johnson & Johnson, and Xerox Corp have told investors over the last two weeks that they see the pain from the dollar’s two-year rally easing, allowing them in some cases to beat earnings estimates and raise their outlooks for the rest of the year.
Less well-known companies are benefiting, too: insect repellent company Rollins Inc said the weaker dollar was a key reason why it beat estimates when it announced its quarterly results Wednesday, while medical supply maker C.R. Bard Inc cited the weakening of the dollar when it announced that it was raising its guidance for the year. (…)
Johnson & Johnson, for instance, said the strong dollar took a 3.3 percent slice out of global sales in its first quarter, half of the impact from the quarter before. Its shares rose 2.7 percent after it reported its results, hitting a record high.
Overall, 72 percent of U.S. multinational companies – those which would see the largest impact from currency fluctuations – have beat earnings per share
estimates this quarter, in large part because of the dollar’s decline, according to Thomas Lee, managing partner at Fundstrat Global Advisors.
In a sign that the dollar’s slide should continue to help for the remainder of the year, analysts have raised their earnings per share estimates for 57 percent of multinationals, by an average of nearly 1 percentage point, he said.
The dollar’s retreat comes on the heels of the fourth quarter of 2015, when currency translation took $33.94 billion out of North American company revenues, the worst negative impact in nearly five years, according to research firm FireApps. (…)
US stocks in worst week since February Investor unease sees valuations snap back after surge from February lows
A two-day sell-off in US equity markets has put the benchmark S&P 500 nearer to negative territory for the year as the momentum that boosted the index near its peak has faded.
The index — which counts $2.1tn of investments linked directly to it — suffered its worst weekly performance since the market trough in February, although last minute buying kept the S&P 500 positive for the month of April. (…)
For the week, the S&P 500 slipped 1.3 per cent while the technology-heavy Nasdaq Composite declined 2.7 per cent under the weight of a sliced Apple valuation. (…)
Sell Stocks in May? Tempting but Not So Smart
(…) It worked last year. If an investor sold the S&P 500 on the Friday before Memorial Day and rebought the index the Tuesday after Labor Day, she would have avoided a 7.4% decline.
Otherwise, the benefits are a bit fuzzier. Stocks gained during the summers of 2012 and 2014. In 2011 and 2013, they fell. (…)
Since 1970, the S&P 500 has gained 1% on average in the period between Memorial Day and Labor Day, according to an analysis by Ana Avramovic, trading strategist at Credit Suisse.Stocks rose during 30 of those summers by an average of 5.6%. The declines were more painful, averaging 8% in the 15 years stocks declined between Memorial Day and Labor Day, Ms. Avramovic’s analysis shows. (…)
During the period between Memorial Day and Labor Day, daily stock-trading volumes on the New York Stock Exchange tend to fall about 3.1% below yearly averages, according to data going back to 1996. Fewer shares changing hands means swings in the stock market can be sharper. (…)
Ben Jacobsen, a finance professor at TIAS School for Business and Society in the Netherlands, said he makes it an annual routine to take a much longer trading hiatus, based on his own research into seasonal market trends.
He and his colleagues found that world-wide, investors averaged 4.5% better returns between November and April than between May and Halloween.
The so-called Halloween effect of improved seasonal performance persists in 82 of 109 stock markets studied.
In the U.K., where data goes back three centuries, investors who follow that strategy for five years have an 80% chance of beating the market, based on his historical analysis. Over 10 years, it becomes a 90% chance. His results exclude transaction costs and taxes.
He has been investing according to the strategy since the 1990s, and currently commits about half his portfolio, investing the other half in stocks held long-term. In the U.S., he keeps his money in low-volatility exchange-traded funds for the summer. In Europe, he goes to cash.
“It doesn’t make you rich,” he said. “But it makes you richer a little bit faster than other people.”
Analysts at Northern Trust Asset Management found in a 2012 report titled “Sell in May…and Pay!” that investors face significant downsides getting in and out of the market around the summer.
Even if the time period is extended to include Halloween, U.S. capital-gains taxes alone erode the value of the approach, they found.
Meanwhile, investors also face transaction fees, missed opportunities and confusion about when to buy back in. (…)
The Blog of Horan Capital Advisors has more on this:
(…) In an article from Chart of the Day from several years ago, it is noted,
“The stock market is about to enter what has historically been the weakest half of the year. Today’s chart illustrates that investing in the S&P 500 during the six months of November through and including April accounted for the vast majority of S&P 500 gains since 1950 (see blue line). While the May through October period has seen mild gains during major bull markets (i.e. 1950-56 & 1982-97), the overall subpar performance during the months of May through October is noteworthy. Hence the saying, ‘sell in May and walk away.'”
Source: Chart of the Day
The above chart provides pretty clear evidence of the strength of the market from November to April or the weakness from May through October. However, evaluating the magnitude of the performance difference between the two periods is important. Jeff Miller, PhD, the author of the Dash of Insight blog, has noted,
“The seasonal slogans often substitute for thinking and analysis. The powerful-looking chart…actually translates into a 1% monthly difference in performance. The “good months” gain 1.3% on average while the “bad months” gain about 0.3%.
The below chart displays the average returns for various intra-year periods.
Source: CXO Advisory Group
One aspect of the of the May to October period is the fact downside volatility is greater. According to a recent article from Charles Schwab, in secular bull market periods the May-Oct. performance range is -13% to 20%. The return range in the Nov.-Apr. period is -5 to 24%. Investors should note, the strategy is not full proof. In the same Schwab article just referenced,
“The “strategy” did not work for the three years from 2012-2014, or for the five years from 2003-2007, when there were gains between May and October in each year. In addition, as you can see in the [table in the article], there is a meaningful difference between how the market performs from a seasonal perspective in secular bull or secular bear markets. Average gains and the percent of positive cases have been higher in secular bulls than in secular bears (even if they are still lower than in the November through April period).”
So certainly, a “Sell in May” strategy has historical validity, but the weaker return in the May to Oct. period does not mean the returns will be negative. Take under consideration we are in a presidential election year, and yes, the May to Oct. period is the strongest.
Source: MarketWatch
The “sell in May’ strategy is certainly not as clear cut as the adage states. Additionally, with all the focus on the strategy now, the market tends to enjoy proving the consensus wrong.
Wait, there’s more: this from Cumberland Advisors:
In order to compare time-series returns, we construct our experimental portfolio with a “Halloween indicator,” which keeps us invested in the S&P 500 from October 31 to April 30. The control portfolio is just the opposite – invested from April 30 to October 31. As shown in Figure 1, using data going back to 1950, on average the experimental portfolio (November–April) outperforms the control portfolio (May–October) by 5.64% annually. This result is statistically significant at the 1% level, which means we can say with great confidence that the “sell in May” portfolio should outperform the “sell in November” one. Specifically, the average return from November to April is 6.99%, while the other six months’ yield is only 1.35%. Nevertheless, the realized standard deviations are fairly close: 10.09% for the experimental portfolio and 9.36% for the control. Summers traditionally see an uptick in volatility. (…)
Remember, this is a probability game. We know the odds are poorer between May and October and we know that volatility is higher. These two factors are especially dangerous when valuations are on the higher side of the ledger.
