Market commentary: US consumers spending and the discretionary sector

In the day following the failed attempt of an early bailout compromise between Greece and the rest of EU Member States, the European markets displayed a resilient session with solid positive gains across the board, from the Euro Stoxx 50 adding 1.29%, to German’s Dax Index adding 1.56%, to Italian’s FTSE MIB Index up 2.13%.

The US equity markets followed suit, with all indexes from the Dow Jones Industrial Average down to the Russell 2000 posting daily gains between 0.60% and 1.25%. Overnight, Asia equities were also higher, boosted by geopolitical positive news concerning a cease-fire in Ukraine and a timid opening from Germany, willing to discuss any realistic Greek’s deal proposal.

Judging from the performance of the equity markets, it seems that investors have not been paying great weight onto the latest disappointing US retail sales report that saw sales felling by 0.8%, which went to add to another decline recorded in December 2014.

Most likely investors have played down this potentially negative news as being mainly impacted by a substantial decline in sales’ values related to service and gas stations that have seen the price of petrol dropping along with the plunge in crude oil prices.

Although at first markets have not reacted negatively to this report, some analysts have also started to point out how the positive reduction in oil prices, that has been putting more money in the consumers’ pockets, is not really translating into additional spending. This may also be related to the fact that the persistent depressed oil prices are starting to affect drillers and producers across the world, with large and small companies, alike, beginning to cut workforces and spending budgets to face increasing debt loads and sky-falling revenues. Such a trend can be seen in the jobless claims report of last week that displayed an increase of 25,000 new claims bringing the total jobless applications to 304,000.

In this mixed environment, the retail and consumers discretionary sector has not done too bad, with some big names reporting solid and healthy revenues growth and improved profitability.

Starbucks Corp., which reported earlier in January, exceeded by far analysts’ expectations on both revenues and EPS, jumping around 8.5% on the news, and helping the stock returning 24% over the last 12 months, and 11.91% since the start of 2015. The company has also increased its dividend by 23%, bringing it to $0.32 per share or a forward yield of 1.39%.

Shares in the company are trading at all times highs with a good possibility to see the price tag reaching the $100 mark throughout the course of year.

Home Depot Inc, the larger home improvement retail-store, has also been a winning pick for investors after delivering substantial revenues growth and solid profit over the last 2 quarters, prompting analysts to rise their expectations for the company’s next earnings release due next Tuesday 24 February.

Shares in Home Depot are also trading at all times high and north of the psychological $100 a share. The stock has delivered a 46.71% capital appreciation over the last 12 months and 6.85% since the beginning of the year.

Amazon.com Inc., also a big name in the retail discretionary sector, gained around 15% on January 30th after announcing soaring profit and beating analysts’ expectations. Shares in the e-commerce giant have appreciated over 21.50% so far this year and some analysts believe the stock still has upside potential, especially when compared to rival eBay Inc., which has delivered rather disappointing returns and has witnessed eroding margins and profitability. 

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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