The 10-year bond continued its rally on Wednesday as its yield has fallen about 22 basis points from its high in mid-March. This is a powerful signal that the market has soured on the reflation trade. It has begun to reject the notion that 2017 GDP will accelerate from the morbid growth of 2016. To me, this reaction is delayed because GDP estimates for Q1 had been falling before mid-March. The delay may be related to the internal mechanics of the market as there have been many traders on the short treasuries bandwagon.
With the ECB cutting its monthly bond buying from $80 billion to $60 billion in April and the Fed preparing to raise rates by 25 basis points in July again, stocks will need to rely on earnings growth to continue this lengthy bull run. The chart below breaks down the growth estimates for 2017 earnings by sector. If any of the sectors miss expectations, another sector will have to make up for its underperformance
I’m looking for the consumer discretionary sector to miss the current 5.8% growth estimate. Brick and mortar retail sales have been as bad as the depth of the 2008 recession on a non-seasonally adjusted basis. I previously showed the spiking bankruptcies in retail in 2017. The chart below shows the spiking number of retail store closures announced in 2017. Bebe and The Limited are closing all their stores. The total retail store closures is over 3,500 stores. The decision to close stores is probably a good one for individual firms which will improve profits, but it is a signal consumer shopping trends are headed south. While closing an underperforming store in a mall is good for that specific firm’s bottom-line, the other stores feel the effect of weaker mall traffic as a result.
The weakest segment of retail, which is brick and mortar, is the first to feel the pain before the stronger part, which is online, sees weakness. It is shocking to see consumer sentiment at cycle highs with all these store closings happening. Consumers are hoping to spend more money in the future when they get a tax cut, but these retailers needed sales improvements to happen last year to prevent closures.
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