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Consumer Spending Is Driving the Bull Market -- Barrons.com

Dow Jones Newswires | July 19, 2019 10:54:00 PM ET

Though there were signs of manufacturing and industrial weakness in the U.S. in the first half of 2019, buying by consumers has been notably strong -- and that's been good news for businesses that serve them. With jobs plentiful and wages on the rise, the trend looks likely to continue.

June retail sales figures, released on Tuesday, capped off a roaring second quarter for consumer spending, which represents over two-thirds of U.S. gross domestic product. Retail sales, excluding autos, gas, and building materials, grew at an inflation-adjusted 6.1% annualized rate last quarter, according to Tom Porcelli, RBC Capital Markets' chief U.S. economist -- the fastest pace in over a decade and a half.

The third quarter also appears to be off to a good start. Amazon.com (ticker: AMZN) whipped out a bevy of superlatives to describe its record-breaking Prime Day last week. Preliminary July consumer sentiment survey data from the University of Michigan, released on Friday, remained optimistic.

The S&P 500's consumer-discretionary sector -- up 24.2%, including dividends -- trails only tech in 2019. The broad-market S&P 500 is up 20.8%.

Among companies reporting during the first week of earnings season, consumer-focused businesses outpaced their more industrial or manufacturing-sensitive peers, noted Edward Yardeni, president of Yardeni Research.

"The U.S. consumer continues to keep the bull market moving forward," he wrote to clients on Thursday. "This week saw bank earnings bolstered by consumer lending, retail sales up strongly, and airline earnings kept aloft by travelers willing to spend."

While pressure on net interest margins -- given the potential for an interest-rate cut as early as this month -- and weak trading revenues presented headwinds to some big banks' earnings in the second quarter, consumer banking and lending showed no signs of slowing.

Net income at Bank of America's (BAC) consumer banking division rose 13% from the level a year earlier. Net climbed 11% at Citigroup's (C) U.S.-dominated global consumer banking group, and 22% at JPMorgan Chase's (JPM) consumer and community banking unit.

"The consumer in the United States is doing fine," said JPMorgan Chief Executive Jamie Dimon on the company's earnings call Tuesday. "Business sentiment is a little bit worse, mostly probably driven by the trade war."

In the transportation sector, strong demand for seats and tighter capacity from the forced grounding of Boeing's (BA) 737 MAX airliner led to earnings gains of 54% at United Airlines Holdings (UAL) and 43% at Delta Air Lines (DAL) in the second quarter, compared with results in that period last year. Railroad CSX (CSX), which reported weaker-than- expected profits on Tuesday, lowered its sales projections for the remainder of 2019, citing wan freight volume.

Look for that second-quarter consumer strength to boost earnings at the likes of Visa (V), Chipotle Mexican Grill (CMG), American Airlines Group (AAL), and Amazon, when they report this coming week.

"The present economic backdrop is one of the most puzzling I have experienced in my career," CSX CEO James Foote said on Tuesday evening's earnings call.

The contrast between the economy's consumer and industrial segments is stark. RBC's Porcelli predicts 4% growth for overall consumer spending in the second quarter. That information will be released on Friday, just ahead of the Fed's July 30-31 rate-setting meeting.

As Porcelli put it in a note to clients, the central bank is about to cut rates "even in the face of very sound economic fundamentals" in what he called "the most significant part of the U.S. economy -- households."

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com