Key Points

- Despite recent negative headlines from the retail sector, we believe consumer spending remains on track and should be a tailwind for the broader U.S. economy.
- Market volatility is likely to persist, but we think equity prices will grind higher as corporate earnings results improve.

The S&P 500 Index fell 0.4% last week, although it remains in positive territory for the year.1 The retail sector was a heavy focus last week as earnings results were broadly disappointing. The cancellation of the Staples/Office Depot merger also caused sentiment to sour on retailers. The rally in the U.S. dollar continued, as U.S. growth continues to outpace most of the rest of the world.1 Oil prices rallied while most industrial metals were lower.1

The Consumer Sector Should Help Drive Economic Growth

Disappointing first quarter earnings results from many large retailers have been causing some to question the strength of consumer spending. Economic data from last week, however, showed some positives for the consumer. April’s retail sales figures showed a 1.3% increase, notably higher than the consensus expectations of 0.8%.2 Likewise, the latest reading of the University of Michigan’s Index of Consumer Sentiment rose from 89 in April to 95.8 in May, its highest level in eleven months.3

In our view, these readings help reinforce the notion that the consumer sector remains quite healthy despite some earnings struggles. A possible slowdown in employment growth should be counter-balanced by rising wages. We believe consumer spending remains an important tailwind for the broader economy, which we expect should continue to grow close to 2%.

Reasons for Optimism...and Pessimism

Rather than our usual weekly economic and investment themes, this week we offer a list of reasons to be optimistic about the economy and equities, as well as a list of reasons to be pessimistic, adapted from some thoughts by J.P. Morgan Research.

On the positive side, we would include:

1. Equity valuations do not appear to be stretched.
2. Earnings improvements should start to materialize in the coming quarters.
3. The oil rout appears to be over.
4. Investor sentiment may be overly bearish.
5. Corporate tax reform prospects for next year appear bright.