August 15, 2017

The major stock market averages opened higher but quickly gave way. The Dow is currently up 9 pts and the SPX is flat. Banks, healthcare, consumer staples and utilities are in the green. But energy, real estate, telecom and consumer discretionary sectors are lower. Traders are wondering whether last week’s mini-pullback is really over yet. The VIX Index is back down under 12. European stock markets are poised to close up about .3%. The dollar is stronger today as a result of better than expected economic data (see below), and commodities are therefore a bit lower. WTI crude oil is trading lower to $47.30/barrel. Bonds are also trading lower. The 5- and 10-year Treasury yields are back up to 1.81% and 2.26%, respectively. 

Home Depot (HD) reported strong second quarter results, with 6% y/y revenue growth and 14% earnings per share growth. The company has now exceeded Wall Street consensus earnings expectations for thirteen straight quarters. Even more impressive, same-store-sales surged 6.3% in the quarter compared with analysts’ average forecast of 4.9% growth. And management raised full-year 2017 earnings per share guidance to $7.29, slightly ahead of expectations. So why is the stock down 3% this morning? Well, HD is up about 200% over the last 5 years, far outpacing its competitors and the S&P 500 Index. And it is now trading at a forward P/E of about 19 compared with Lowe’s at 15. So some analysts are saying the stock is expensive. 

US retail sales accelerated in July to 4.2% y/y growth. Barron’s says, “The consumer was back in the stores last month.” E-commerce in general, as well as vehicle dealers & building materials stores led the way. In addition, the Bureau of the Census revised June retail sales data to show stronger growth than previously reported. For some context, retail sales growth has been bouncing around in the range of 1.5% to 5.5% since mid-2012. 

The National Assn. of Homebuilders’ Market Index improved to 68 this month from 64 last month. This is a sentiment, or optimism, survey of companies that build homes, and it is now very close to a 10+year high. This is good news, coming after 2 consecutive months of declines in optimism. Recently, inflation has receded a bit so long-term interest rates  (i.e. mortgage rates) have come down again. In addition, the Fed assures us that its plan to unwind the balance sheet won’t have a large impact on longer-term rates. 

Citigroup’s US Economic Surprise Index is on the mend again. Economic growth faltered in the first several months of the year, as we all know. But since then, data have been progressively better for the housing market, job market and retail sales. The index fell to -79 in June, the worst since 2011. Since then, it has rebounded to -35. The trend is clearly upward.  

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