Surprises in Consumer Confidence

Consumer confidence showed an unexpected decline for the month of May, falling from 119.4 down to 117.9. With that drop, consumer confidence saw its first back-to-back drop since May of last year, although it still remains well above its long-term average of 93.

There's a fascinating divergence in confidence based on income levels in the past two months. Sentiment among consumers with incomes greater than $50,000 has dropped over 10 percentage points in the last two months, which is the largest two-month decline in two years. But confidence levels among consumers with incomes between $35,000 and $50,000 actually increased this month and is barely down in the last two months.

But for lower-income folks, it's a completely different story. For consumers with annual incomes below $15,000, confidence is at its highest level in nearly 16 years.

The Big Boppers

It's been a strong year so far for the S&P 500 index, rising nearly 8 percent on the year. But it's been remarkably top-heavy: If we strip out the performance contribution of the five largest stocks in the S&P 500, the index is up only 4.6 percent.

Those five biggest stocks are:

• Apple,  up 16 percent
• Facebook, up 32 percent
• Amazon, up 33 percent
• Microsoft, up 13 percent
• Alphabet,  up 25 percent

At the start of the year, these five stocks accounted for 11.6 percent of the index’s market cap. That share stands at about 13.7 percent today.

Thoughts for Memorial Day

"It is foolish and wrong to mourn the men who died. Rather we should thank God that such men lived." ~ George S. Patton

“The legacy of heroes is the memory of a great name and the inheritance of a great example.” ~ Benjamin Disraeli

"The U.S. Military is us. There is no truer representation of a country than the people that it sends into the field to fight for it." ~ Tom Clancy

High Prices in Retail

Yesterday was a rare good day for retail stocks, as strong first-quarter results from retailers such as Best Buy and PVH led indexes to record highs. Best Buy soared 21.5 percent to $61.25 after the electronics retailer issued a strong first-quarter report, including better sales of mobile devices and gaming products.

PVH, the owner of brands including Calvin Klein and Tommy Hilfiger, climbed 4.8 percent to $107 after it raised its annual forecasts in the wake of its own strong report. Other retailers — including Guess, Abercrombie & Fitch and Burlington Stores — also made substantial gains.

There was good news for the biggest online retailer as well. Amazon rose 1.3 percent on the day,  peaking at a tantalizing $999 per share before falling back to $993.

Skipping Vacation

Are you going on vacation this summer? Are you taking all the time your employer gives you? The average U.S. employee who receives paid vacation has only taken a little over half, or 54 percent, of those days in the past 12 months, a new survey of over 2,200 workers by careers website Glassdoor has found.

This is up slightly from how much vacation time employees reported taking in 2014, when Glassdoor first conducted this survey; it was 51 percent then. If an average worker who receives two weeks vacation leaves five days on the table, they’re effectively giving hundreds of dollars back to the company.

Why don’t they take what’s due? They fear getting behind on their work (cited by 34 percent), they believe no one else at their company can do the work while they’re out (30 percent), they are completely dedicated to their company (22 percent), and they feel they can never be disconnected (21 percent).

A Slow Summer Gas Season

If you’re planning to kick off your summer with a Memorial Day road trip, you couldn’t have picked a better year to do so. Gas prices going into the holiday, considered the unofficial start to the summer driving season, are well below where they typically are at this time of year, according to data firm Bespoke Investment Group.

A gallon of gas costs an average of $2.36 per gallon in the U.S. right now, 22 percent below the $3.04 average going back to 2005. It has only been cheaper to fill the tank in two other years since then: 2016, when prices were at $2.29 a gallon, and 2005, when they were at $2.12.

And this is the time of year, as we enter the summer, when prices are normally the strongest. On average, prices are up 22 percent between the start of the year and May 23, but thus far in 2017, prices are up a mere 1.1 percent, the lowest year-to-date increase in Bespoke’s data set by far.

Earnings Season Roundup

First quarter earnings season is now in the books. A total of 2,450 companies reported earnings, and of these, exactly 1,500 of them reported better than expected EPS numbers. That’s a 61.2 percent earnings beat rate.

Those stocks, not surprisingly, tended to rise in value after their reporting dates. On average, the stocks that beat their earnings estimates this season gained 1.97 percent on their earnings reaction days.

Since 61.2 percent of companies beat EPS estimates, that means 29.8 percent of them missed their estimates. These stocks averaged a one-day decline of 3.21 percent on their earnings reaction days. In other words, for those that missed, the drop was worse than the gain was for those that exceeded estimates.

History Lesson

The S&P 500 is off to its best start in four years, but that doesn’t mean it will end that way. Through May 18, the S&P 500 has gained 5.7 percent. In the past decade, two other years have better returns over the same time period, as Bespoke Investment Group noted in research published Friday.

In 2013, the S&P had jumped 17 percent by this time of year, and went on to finish the year up nearly 30 percent. In 2011, the S&P 500 had returned 6.6 percent by May 18, but would to take a tumble in August and would finish the year basically flat.

Bespoke also looked at the 10 years that correlated the most with the start of 2017. During those years, the S&P 500 averaged a gain of 4.7 percent from May 18 through end of the year, with returns positive in seven of the 10 years. But one of those years was 1987, when the stock market took a 14  percent tumble between May 18 and year-end.

Spinoffs Lose Their Luster

Companies are finding it more difficult to extract value by spinning off businesses, according to a new analysis from Citi’s investment banking group. The study examined returns for the parent company from announcement to deal completion and returns for the spinoff two years after the transaction closed. Spinoffs underperformed their industry sectors by 5 percent on average between 2011 and 2015.

They used to do much better than that. The underperformance of 5 percent in recent years compares with an average overperformance of 30 percent between 2001 and 2005, and 19 percent between 2006 and 2010.

Despite the negative trend, spinoffs remain popular. Companies completed $121.5 billion such deals globally, according to Dealogic. For the year as of May 17, companies have announced $34.9 billion in spin-offs, 27 percent ahead of last year’s pace.

A Spike in the Fear Index

The CBOE Volatility Index posted its biggest daily jump yesterday since the day following Britain’s vote to exit from the European Union, which upset markets around the world last June. The VIX measures expectations for market swings in the S&P 500 index 30 days in the future.

The so-called Fear Index was up about 46 percent on the day. That is its biggest daily move since June 24. when the index jumped 49.3 percent. The S&P Index lost nearly 2 percent on the day.

Still, the level for the so-called fear gauge remains low compared with its long-term average of 20. This one-day climb comes just a week after the fear gauge registered its lowest close since 1993.

Industrial Output: The Latest Good News

U.S. industrial output rose sharply in April, the latest evidence that economic growth is picking up following a lackluster start to the year. Manufacturing output, the biggest component of industrial production, posted its strongest gain since early in 2014, pushing the Fed’s manufacturing index to a new post-recession high.

Industrial production—a measure of output at factories, mines and utilities—jumped 1.0 percent from a month earlier. That might not sound like much, but it was the largest gain in more than three years.

The strong showing follows a string of upbeat April indicators, including the unemployment rate falling to its lowest level since 2007, solid consumer spending gains at online sellers, restaurants and other retailers, and existing-home sales climbing at their fastest pace in a decade.

The Slow Road to 2400

The S&P 500 finished above 2400 for the first time ever yesterday, crossing a barrier that had proven elusive for months. This wasn't the first time it reached 2400, but it was the first time it had closed there.

The benchmark index first topped 2400 in intraday trading more than two months ago, on March 1, but dropped back below that level before the session ended. In the last few trading days, the index held just below 2400 on a closing basis.

The slow rise is a measure of how calm the stock market has been lately. The S&P 500 rose just 0.48 percent on Monday, its 14th straight session without an absolute move of 0.50 percent or more. That matches a streak last seen in 1995.

The Retail Split

We talked last week about the problems that department store stocks have been having this quarter. It's not about dropping retail sales: A Commerce Department report on Friday showed a seasonally adjusted 0.4 percent jump in retail sales in April, as well as revisions higher to prior data.

But the data also showed a growing divide: sales among nonstore retailers, which includes online shopping, jumped 1.4 percent, while department-store sales had a much smaller increase of 0.2 percent. Nonstore sales are up nearly 12 percent over the past 12 months, while department store sales were down 3.7 percent.

So the news has been good for online retailers; Amazon’s shares climbed 0.6 percent Friday morning. But Nordstrom sank 8.2 percent, Dick’s dropped 6.6 percent, and J.C. Penney fell 7.6 percent. All are down more than 10 percent on the year, and J.C. Penney has fallen more than 40 percent.

Department Store Woes

There's one little segment of the economy that continues to show sign of trouble: Department stores. Big retailers have begun to report results for the first quarter, and the news is not pretty.

Macy’s reported Thursday a worse-than-expected drop in revenue during the first quarter as same-store sales marked a particularly large slide. Kohl’s said same-store sales fell more than expected. Nordstrom reported that same-store sales slipped 0.8 percent versus a year ago.

Macy's promptly sank 15 percent. Nordstrom dropped 8 percent, and Kohl's fell 6.4 percent. The three stocks were the worst performers in the S&P 500 for the session. The SPDR S&P Retail exchange-traded funds fell 2.4 percent on the day.

In the Black

Here's some good news: The federal government ran its second highest monthly surplus on record this April. In its monthly budget report, the Treasury Department said yesterday that the surplus for April totaled $182.4 billion, the second largest surplus after a record $189.8 billion surplus set in April 2001.

Wait a minute, you're thinking: Don't most people pay their taxes in April? Yes they do.The government generally runs surpluses in April, and this year's was inflated because of a deadline change that allowed corporations until April to make their final tax payments for last year.

Through the first seven months of the current budget year, which ends in September, the federal government is running a deficit of $344.4 billion. That's still down 2.4 percent from the same period a year ago.

The Changing Face of Retirement

American are working longer because they want to, not because they have to. That’s according to Gallup's Economy and Personal Finance survey, which shows that 11 percent intend to work full time once they hit retirement age—while just 25 percent of employed Americans plan to stop working altogether.

Among the would-be full-time retirement workers, the majority plan to do so because they want to, not because they have to, and the proportion of “want to” versus “will have to” explanations has risen slightly since 2013. The percentage who say they want to keep working just part time has also increased, from 34 percent to 44 percent.

Two 1995 polls revealed that an average of 14 percent said they expected to retire after 65 and 49 percent before 65. Current retirees present a different image: 68 percent said they retired before age 65, while just 30 percent worked till 65 or older.

The $800 Billion Gorilla

Apple today became the first company to ever have a market capitalization of $800 billion - briefly. Apple stock crossed the $800 billion mark early in the afternoon, but then gave back some of its value before closing, ending the day at a market cap of $797.8 billion.

It's still by far the most valuable company in the world. The rest of the top five, in order of market cap:

• Alphabet $652 billion
• Microsoft $530 billion
• Amazon.com $451 billion
• Berkshire Hathaway $406 billion

Older Debt

The Federal Reserve Bank of New York released numbers recently showing that the share of all household debt held by people aged 60 and older has almost doubled, from 12.6 percent in 2003, to 22.5 percent in 2016. The total debt is now nearly $3 trillion.

Mortgages, auto loans, credit cards and even student loan balances have all grown significantly for older Americans -- and only older Americans. Borrowers under 60 reduced their mortgages and credit card balances relative to the peak during the 2008 financial crisis.

Seniors are holding $67 billion in student loans, and the number of seniors holding such loans has quadrupled since 2005. That makes older folks the fastest-growing segment of the student loan borrower population, according to a recent report by the Consumer Financial Protection Bureau.

April's Jobs Report

The economy bounced back strong in April, adding 211,000 jobs after a disappointing March. The headline unemployment rate ticked down to 4.4 percent, the lowest it's been since prior to the recession.

The March figure, already low at 98,000, was revised down to 79,000 jobs added on Friday. But all told, the economy has added an average 185,000 jobs a month in 2017, roughly matching last year’s pace.

The broader measure of unemployment known as the “U-6” rate fell to 8.6 percent, the lowest it's been since November 2007. This rate takes into account not only unemployed workers, but also Americans who are too discouraged to look for work and part-timers who would prefer full-time work.

The Fed Stands Pat

No surprises on interest rates this month: The Federal Reserve announced yesterday that it held its benchmark interest rate steady after its latest policy meeting, as had widely been expected. The Fed kept the benchmark federal funds rate at a range of 0.75 percent to 1 percent, following the 0.25 percent increase in March.

The Fed acknowledged that the overall economy and consumer spending both slowed down during the first quarter. But they view it as temporary, and think the economy in general is strong enough to withstand further hikes.

In other words, the Fed expects to continue raising interest rates – and the next hike may be in June. The majority of the Fed's 17 leaders predict two or more rate hikes for the rest of the year. That's a faster pace compared to the last two years, when the Fed only raised rates once a year.

Putting the Brakes on Car Sales

Sales at all six of the biggest automakers in the U.S. dropped again in April, with Ford and Honda Motor posting the steepest declines -- about 7 percent each. Five of the six biggest companies — General Motors, Ford, Fiat Chrysler Automobiles, Honda and Nissan — all reported sales falling faster than analysts had forecast. Only Toyota posted monthly sales that were better than expected, but they too were down.

U.S. car sales are expected to fall this year after rising to a record of 17.55 million in 2016, up from 17.5 million in 2015. The annualized pace of U.S. auto sales slowed to 16.9 million in April. A year ago, the rate was 17.4 million.

Industrywide deliveries are down 2.4 percent so far this year compared to the same period last year. The four-month slump reinforces the sense among many that this year will hold the U.S. auto market’s first annual contraction since 2009, the year GM and Chrysler reorganized in bankruptcy court.

Sector Scoreboard

With a third of 2017 in the books, the S&P 500 is up 7 percent on the year, and those gains are pretty broad-based. Nine of the eleven sectors in the index have advanced in 2017 - but the two that have dropped have both fallen quite a bit.

The full scoreboard:

• Information Technology, up 15 percent
• Consumer Discretionary, up 11 percent   
• Health Care, up 10 percent    
• Consumer Staples, up 7 percent    
• Materials, up  7 percent   
• Utilities, up 7 percent    
• Industrials, up 6 percent   
• Real Estate, up 4 percent  
• Financials, up 2 percent
• Telecommunications Services,  down 7 percent    
• Energy, down 9 percent  

A Cool Thousand

Earnings season has driven two well-known stocks close to the thousand-dollar-per-share-price level. Amazon.com reached its all-time high of $950 on Friday, while Google parent Alphabet rose as much as 5 percent, to a fresh intraday peak of $936.

Currently, there are only four companies in the S&P 500 at $1000 or more a share, led by Berkshire Hathaway class A shares, which are currently at nearly $250,000 apiece. The others in the $1,000 club include Seaboard (at $4,234), NVR (at $2,111), and Priceline Group (at $1,846).

Alphabet’s total market value of $607 billion is second only to Apple among S&P 500 companies. And Amazon comes in fourth, with a market capitalization of nearly $439 billion.