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Weekend Reading: Oil & Retail Send A Warning

  • Written by Syndicated Publisher No Comments Comments
    July 10, 2017

    There are two important areas of the market that have historically been good leading indicators of the strength, or weakness, of the markets and the economy. Oil and retail.

    Currently, both areas are sending warning signs that should not be readily dismissed. First, with respect to oil, the bounce in oil following the crash in prices that began in 2014 resulted not only in the bulk of the decline in earnings initially but also the recovery in earnings with the bounce. However, that bounce has now faded but forward earnings expectations have likely not been revised lower. Per FactSet, the energy sector is expected currently to post a 396% gain in earnings on a year-over-year basis. Given the recent fall in oil prices, there is a huge risk of disappointment

    The biggest issue facing S&P 500 earnings going forward is the analyst community’s “miss” on oil price estimates for the bulk of 2017, not just the second quarter. According to FactSet’s estimates, analysts are expecting the following average prices per barrel for WTI crude for the yet-to-be-reported final three-quarters of 2017:

    • 2Q17: $51.96
    • 3Q17: $54.29
    • 4Q17: $55.72

    With oil prices closer to $45 than $50, this could be a problem as, according to FactSetanalysts made the smallest cuts to Q2 earnings-per-share estimates in three years ahead of the reporting season.

    Retail is also sending a warning that, despite surging consumer confidence surveys, consumers are not rushing out to “crack open” their wallets. Per Bloomberg Intelligence survey:

    • Retail 2Q sales results may be impaired by weak traffic, as consumers still prefer digital, and they swap shopping for travel, dining out or outdoor recreation
    • Shopping less in-store continues to hurt retailers’ ability to prompt unplanned purchases
    • In the week ending July 1, footfall at luxury retailers was down 9.7%, 8.3% weaker at apparel stores

    Considering that retail sales make up roughly 40% of Personal Consumption Expenditures (PCE), which is roughly 70% of the GDP calculation, you can understand why this may well be an issue for the markets going forward. As Tom Lee from BofA noted:

    “We have a nominal GDP problem. If real growth is only 2 and inflation expectations are falling, that means nominal growth is only going to be 3. Earnings growth is really essentially going to be 3%, and I think when you see estimates out there that look for 12% growth next year, it’s grounded on this view that inflation picks up and real growth picks up and if neither takes place, then earnings are too high, which is the reason we think estimates are actually way too high out there.”

    The risk of disappointment is rising as the hopes for “tax cuts/reform” continue to fade. As Lee concluded:

    “I think the problem today is that market growth, the rise in the market has way been ahead of GDP growth.”

    Yep. It’s a problem.

    In the meantime, this is what I am reading.



    Research / Interesting Reads

     “If you are in a poker game and after 20 minutes you don’t know who the patsy is, then you’re the patsy.” – Warren Buffett

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Real Investment Advice

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Real Investment Advice: Bringing the complex world of politics, economics, investing and personal financial wealth building to you in simple, easy and informative way.

    Real Investment Advice is the home of the daily blog and weekly newsletter from Lance Roberts, Chief Portfolio Strategist for Clarity Financial. If you want to understand how money and the economy really work, this is your place to start.


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