ECONOMIC AND STOCK MARKET COMMENTARY

The consumer got back into the game in April, after having sat on the sidelines in the first quarter. In all, shoppers were sufficiently aggressive to lift retail sales 1.3% last month, as buyers flocked to auto showrooms, furniture shops, appliance stores, and clothing retailers. They also spent heavily on the Internet. In all, it was retail’s best month since early last year, and suggested that the jump in average hourly wages in April was having an impact.

However, the earlier weakness in retail has taken a toll on the large department stores, some of which have reported weak quarterly results and issued wary guidance. Such poor outcomes have sent the retail group into a tailspin, in what has been an unforgiving stock market. Still, we think that the better recent overall spending tone— if sustained—would give the out of- favor consumer stocks a logical path to recovery.

Meantime, the rebound in retail sales should give a welcome lift to the economy in the current period. This also was the pattern in 2014 and 2015, when a slow start was followed by a solid recovery during the spring. We think this will be the sequence in 2016, as well, with the U.S. economy helped, too, by gains in housing starts and a rebound in industrial output, which will perhaps grow by more than 2% in the quarter ending June 30th. Still . . .

Challenges may arise that could give Americans reason to pause later in the year. Among these would be a renewed slowing in wage gains, a further uptick in oil prices (leading to still-higher gasoline costs), or a Federal Reserve initiated increase in interest rates as early as June or July. This latter event could happen in light of the recent pickup in consumer inflation. The 2016 election and the uncertainties engendered by it could also affect consumer activity over the summer and into the fall.

Meanwhile, the stock market is still hanging in there, even as it suffers a few dents and scrapes. In most cases, the down moves have been brief and contained, attesting to the staying power of the bull market in a backdrop where there are few good alternatives to equity ownership.

Conclusion: Accordingly, we are retaining our positive bias toward the U.S. equity market, at this juncture.

Source:  Valueline.com