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No Spending Lift from the Consumer? Zacks June Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full June Market Strategy report. To access the full PDF, click here.

Here are key excerpts from the Zacks June Market Strategy report--

A. What is holding the U.S. consumer back in this cycle?

One macro matter that is over-discussed with respect to the U.S. economy is the real Gross Domestic Product (GDP) growth rate. The current sitting U.S. gov’t has just passed a big stimulus package aimed at lifting that growth rate.

One close relative that is under-discussed is the 70% of the macro demand equation that gets us there: Real Personal Consumption Expenditures.  

This basic personal consumer-spending variable went negative, or got near to negative, in five of the last six recessions, going back to the mid-1970s.

Before then, the U.S. marked recessions where that wasn’t the case. Real Personal Consumption expenditures routinely broke +5% annually. We even saw +7.5% y/y. A very low annual growth number --back before the 1970s-- would be near +2.5% y/y.

And the recovery of Real Personal Consumption expenditures has been strikingly weak in this recovery.  A peak of +3.9% in Real Personal Consumption expenditures happened in Q1-2015. This growth rate has been sliding down ever since.  

There is a serial pattern in past business cycles: lower peak consumer spending highs. In Q3-1983, the cycle peak was +6.7%. The peak in Q2-1998 was +5.8%. In Q1-2004, it was +4.4%.

B. Five points to keep in mind: On the fragility hidden inside the global landscape.

(1)    The U.S. economy is performing at frictional and/or full employment. This large global economy is likely to do +3.0% real GDP growth in Q2-18, after a winter at +2.2% in Q1.

(2)    A China Trade War could take -0.3% off U.S. and China GDP growth this year and next.

(3)    Across the Pond, there is one ‘sore thumb’ sticking out with poor GDP growth. Consult the following table on the Euro Zone’s real GDP growth track record and the latest Consensus Economics forecasts. GDP growth data starts in 2016 and runs thru 2019. I have it sorted on 2018 GDP growth rates.

(4)    Italy is solidly in last place in 2018. Its GDP growth averages +1.25% over the 4 years.

 

(5)    Don’t think of a quick or easy solution to the Italian political crisis. But it’s also not new.

The Economist Magazine in 2013 explained Italy’s unique circumstance this way—

“Ever since Italy reconstituted itself as a republic in 1946, a year after the fall of Benito Mussolini, it has churned through governments. In the 67 years since Italians have had 61 governments (or 62, if you count Mr Letta’s), each one lasting for a little more than a year on average.

“This is partly by design. Italy was a divided country in 1946: the south voted in a referendum for a monarchy, whereas the north wanted a republic. One aim of the new constitution was to take proper account of Italy’s many regional variations. Another was to make sure that Mussolini’s rise to power could never happen again. Both of these wishes pointed towards a constitutional system with a weak executive, which is what Italy got.”


C. What does this all mean?

I think those of us who live in the USA understate the resistance that is building outside the country, on a number of fronts. I also think there is an element of radical political emulation taking place in already-fraught spots like Italy.

Stocks likely remain volatile.                                                                       

D. Zacks’ June Sector/Industry/Company telescope:

The status of consumer spending is under across-the board stress. +1.0% U.S. consumer growth in Q1 was picked up last month. Q2 may be no different.

Credit card debt, satiation, and Trade War hits are apparent. Consumer Discretionary and Consumer Staples sectors both fell all the way to Very Unattractive.

(1) Industrials fell back to Attractive from Very Attractive last month. Machinery remained Hot, but Machinery Electrical fell back to a Market Weight. The other hot spots are Metal Fabricating, Industrial Products-Services and Conglomerates.

Top Zacks #1 Rank (STRONG BUY) Stock: Reliance Steel & Aluminum Co. (RS - Free Report)

Reliance Steel & Aluminum Co. is one of the largest metals service center companies in the United States. The Company provides value-added metals processing services and distributes a full line of over 100,000 metal products.

(2) Energy rose to Attractive from Market Weight. The best is Energy-Alternates and Oil & Gas Integrated. There are no Energy Sector weak spots to note.

Top Zacks #1 Rank (STRONG BUY) Stock: China Petroleum and Chemical Corp. (SNP - Free Report)

China Petroleum and Chemical Corp. is a joint-stock company focusing on its core business of petroleum and petrochemicals with integrated upstream, mid-stream and downstream operations and a complete marketing network.

(3) Health Care rose to Attractive from Market Weight. The rise of Medical Care to a Very Attractive spot did the trick here.

Top Zacks #1 Rank (STRONG BUY) Stock: Addus HomeCare Corp. (ADUS - Free Report)

Addus HomeCare is a comprehensive provider of a broad range of social and medical services in the home. The company's services include personal care and assistance with activities of daily living, skilled nursing and rehabilitative therapies, and adult day care.

(4) Info Tech fell back to Market Weight from Attractive in June. The best is still the Semiconductors.

(5) Materials fell back to Market Weight from Attractive. At top is Paper alone.

(6) Financials stayed Market Weight. The best is Investment Banking & Brokering.

(7) Utilities fell back to Unattractive from Market Weight. Water Supply is terrible.

(8) Consumer Staples fell back to Very Unattractive from Unattractive. Only Food/Drug Retail made it to a Market Weight. Trade War effects are apparent here.

(9) Consumer Discretionary fell back to Very Unattractive from Unattractive. The top industry is Non-Food Retail/Wholesale. That retail surge is worth looking into.

(10) Telco’s fell to Very Unattractive from Unattractive.



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