Consumers Flexed Their Muscle in April; Confidence in the Stock Market Plummeting

Strong job growth during the first three months of this year coupled with higher wages encouraged consumers to spend at the highest rate in over a year. Retail sales soared 1.3 percent in April, reversing a series of disappointing economic indicators for the month. Because consumer spending accounts for approximately 70 percent of GDP, a strong start to the second quarter should help compensate for weak first-quarter economic growth for the third consecutive year.

Retail and Food Ex. Auto2

Retail sales growth was driven by auto sales, which surged 3.5 percent from the prior month. Internet sales and gasoline stations also posted strong month-to-month gains, recording growth of 2.1 and 2.2 percent, respectively. Despite the monthly increase, gas prices remain below the year-ago average, keeping annual sales at gasoline stations 11 percent lower than during April of 2015.

Although consumers opened up their wallets last month, confidence in the stock market has declined. According to a report from Bank of America Merrill Lynch, investors pulled $44 billion out of the stock market during the past five weeks, including $7.4 billion last week. Much of that money was diverted into low-risk investments such as bonds and precious metals. Due to the volatility in the markets over the past nine months, many investors are taking the “sell in May and go away” adage to heart.

Together, the increase in retail sales and lack of confidence in the stock market is a problem for investors. Furthermore, yields outside of the stock markets have been difficult to find. The 10-year Treasury is trading below 2 percent, and other bonds are offering few returns. Some investors are expected to allocate funds into alternative investments, including real estate. In the first quarter, national single-family cap rates averaged 5.8 percent, and many areas of the country offered higher first-year returns.

Sources: HomeUnion Research Services, Bank of America Merrill Lynch, U.S. Census

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