By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Consumer-related stocks, at the
vanguard of this year's rally, may face particular headwinds this
week as retailers report earnings and a slew of consumer data hits
investors.
While earnings and economic data have not been particularly
strong, it's difficult to tell that from stock performance. This
quarter alone, the Dow Jones Industrial Average (DJI) is up 3.7%,
the S&P 500 Index (SPX) has advanced 4.1%, and the Nasdaq
Composite Index (RIXF) has grown 5.2%. Both the Dow and the S&P
500 gained 1% this past week, with the Nasdaq up nearly 2%.
Plus, the Dow industrials and S&P 500 continue to push
against all-time highs. While some have said the mantra of "sell in
May, and go away" isn't in play this year, others see stocks as
being stretched and ripe for a correction. Additionally, Federal
Reserve Chairman Ben Bernanke on Friday said the central bank was
on the lookout for any excessive risk taking in investors's "reach
for yield."
With a lack of data in the past week, the market may face more
of a headwind in the coming week as investors are hit with a
torrent, said Scott Armiger, manager of the Christiana Trust at
Wilmington Savings Fund Society.
With consumer spending such a large part of the economy and more
than 90% of S&P 500 companies having reported earnings,
investors are likely to be more sensitive to the data given most
are looking for a correction out of the corner of their eye and
markets are well past several strategists's targets for the
year.
Here comes a big mess of consumer data with a side of retailer
earnings
Consumer data will get a fair amount of play with April retail
sales data on Monday, the April consumer price index on Thursday,
and May consumer sentiment on Friday. A recent pickup in energy
prices will likely make higher payroll taxes more noticeable to
consumers, Armiger said.Read Economic Preview: Consumers are
holding up relatively well.
"As the tailwind of lower gas prices ends, I don't think the
consumer gets any more help," Armiger said.
Add to that retailer earnings this week and it could get messy
for those sectors which have enjoyed quite a rally this year.
Consumer discretionary stocks are up nearly 20% and consumer
staples are up nearly 18%, the second- and third-best industry
sectors on the S&P 500. They've outpaced the 14.5% rise for the
benchmark.
This week Macy's Inc. (M), Nordstrom Inc. (JWN), Kohl's Corp.
(KSS), J.C. Penney Co. (JCP), and Wal-Mart Stores Inc. (WMT) report
quarterly earnings. The week after that TJX Cos. (TJX) , Home Depot
Inc. (HD) , Target Corp. (TGT) , Dollar Tree Inc. (DLTR) , and Ross
Stores Inc. (ROST) report.
(Read more on retail at the Behind the Storefront blog:
http://blogs.marketwatch.com/behindthestorefront/.)
Other data points coming out include the April producer price
index, the May Empire State index, and May homebuilders index on
Wednesday.
Don't get too tied to any one data point
Even though this week is data-rich as opposed to last week's
data-poor week, Tobias Levkovich, chief U.S. equity strategist at
Citi Research, said that investors shouldn't get too tied to one
data point.
Levkovich, who prefers a big picture view, said the lack of a
slump so far in the market isn't the result of one data point or
another, but more a read of longer-term conditions.
"Credit conditions were telling us last fall we weren't going to
have a slump," Levkovich said.
What concerns Levkovich more is late summer "when people realize
Europe's still struggling," he said. Also of interest is what comes
out of this year's Federal Reserve conference in Jackson Hole,
Wyo., and how politicians handle the debt ceiling in September , he
said.
Levkovich, who is sticking by his 1,615 S&P 500 end-of-year
target, currently sees consumer staples and health-care stocks as
being stretched, with utilities as more attractive.
Health-care stocks out on a limb?
Health-care stocks, the best performing sector this year with a
nearly 21% gain, have not been getting that strength from their
core pharmaceuticals companies but rather from more volatile
biotech companies and from managed-care companies reaping Medicare
benefits. The sector also accounts for a fair share of revenue
misses this earnings season with 66% of companies falling short of
Wall Street estimates, compared with a 53% miss for S&P 500
companies, while health-care earnings have slipped 0.1%, according
to Thomson Reuters figures.
While sectors such as energy and materials have also had lower
revenue and a high percentage of misses, those declines are firmly
linked to lower commodities prices unlike in the health care
sector. That's a cause for concern, says Levkovich.
Read Health Exchange for more on health-care stocks.
Broadly, stocks have benefitted from more upward earnings
revisions this season with 54.8% of S&P 500 companies raising
some part of their outlook, compared with 46.2% in March, Levkovich
said. That could prove to be problematic in the future given that
many companies topped lowered expectations this season.
For the first quarter, out of the 451 companies in the S&P
500 that have reported, earnings have grown 5.7%, while revenue has
slipped 0.2%, according to Thomson Reuters.
Key themes coming out of earnings season thus far include margin
support from low inflation and stronger pricing, challenges from
international growth, and how the sequester and higher payroll
taxes have affected business, according to Goldman Sachs in its
recent S&P 500 Beige Book.
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