Markets continued above breakout range even as the pause later last week saw volumes fall. This is likely more caused by the simple fact that it’s summer. Indeed while we are about halfway through it, recall that most of the investor crowd is not even present.

Imagine that, the worst start to the year in 80+ years back in Jan/Feb – the sell in May crowd being active with all the usual media hype on the topic – and then – new record highs in the middle of summer, while no one is watching. Not a surprise at all to our readers.

Supported By Better Data

Yes, we got records in the markets last week – to almost no fanfare. That’s better news than many will perceive.

The record-setting readings of the S&P 500 along with the slight rebound in the 10-year bond yield paralleled a string of strengthening economic indicators here in the US. Let’s summarize:

The Citigroup Economic Surprise Index has gone vertical in recent days, and is up from this year’s low of -55.7 on February 5 to 21.9 on Friday. This is the highest reading since mid-January of last year.

The latest rise in this index started with June’s better-than-expected payroll employment report on July 8.

At the end of last week, as covered in your Friday notes, both retail sales and industrial production showed better-than-expected gains of 0.6% for June.

After retail sales data were released early Friday, the Atlanta Fed’s GDPNow showed real consumer-spending growth increased from 4.3% to 4.5% YoY. Indeed, real GDP growth for Q2 is now estimated at 2.4%, up from 2.3% on July 12.

While still requiring patience, we stand by the idea that we should continue to see steady growth building under the surface – becoming “more obvious” once we get past Q3 and round-trip the final portions of the weakest areas in the energy sector.

As I noted Friday, technology and retrenching have now put many energy companies into the profitable zone on much lower crude prices. That is excellent consumer news for the long-term.

Earnings Flow Set on High

It has been pretty quiet so far – with AA kicking off a nice beat (5 cents over a 9 cent expectation). These next few weeks however, will pick up steam as hundreds report – 116 will report this Thursday alone. Take heart but also expect that to increase potential for knee-jerk reactions always prevalent during earnings seasons. Let’s keep an eye out for opportunity in the summer doldrums as well.

A snapshot for this week:

On Monday, Bank of America and Charles Schwab release Q2 numbers. IBM, Netflix, Yahoo! and VMware all report Monday after the close.

On Tuesday morning we hear from quite a few blue chips like Johnson & Johnson, Philip Morris International, UnitedHealth, Lockheed Martin and Goldman Sachs. Microsoft is the only big company reporting Tuesday after the close.

Morgan Stanley, Abbott Labs and Halliburton report Wednesday before the open, while Intel, Qualcomm, American Express, Las Vegas Sands and eBay report Wednesday after the close.

As noted above, Thursday is the biggest day for earnings reports next week with 116 companies on the calendar. The biggest reports set for Thursday morning will be Biogen, General Motors and Union Pacific. On Thursday after the close, we hear from AT&T, Visa, Schlumberger and Starbucks. On Friday, General Electric, Honeywell and VF Corp will round out the week.

Of the largest set to report this week, VMware, Johnson & Johnson, UnitedHealth, Lockheed Martin, Goldman Sachs, Visa and PayPal have the highest earnings beat rates – all above the 90% mark.

“Stay Home” Stays Solid

Continued stress in other regions of the world may help to explain why investors seem to steadily move toward US assets as turmoil grips many other economies. Turkey is merely the latest as an attempted coup stole the headlines briefly from Nice after its terrible attack.

These notes have suggested for years that staying home would likely be the best step as multiple tectonic shifts swirl through the global economy. Long-term I suspect that continues.

Surely, many can see that US stocks don’t appear “cheap” when compared to those in the rest of the world right now. That likely changes by a surprising element – US “values” are set to increase as margins hit their second gear and profits rise with Gen Y seeping into the system.

Remember, values are not based on “what’s now.”

Over time, long-term investors learn they are based on “what’s next.”

We can be grateful that the US economy still performs better than most others, even during times of turmoil. This likely comes from the fact that we are more diversified and resilient than most. As much as it is in the news, the economy here is not terribly exposed to the recurring EU/Eurozone panics/crises.

On top of this, while the Eurozone and Japanese economies are sheepishly growing, China’s economy is even more dependent on stimulus programs and easy credit to avoid a much faster slowdown. All of this is an effort to “overcome” their terribly planned one-child policy – a step which has crippled their ability to grow rapidly in the future. Think Japan in the late 80’s.

Consumers and the Internet

We hear much about the death of retail. We suspect there is no real death so to speak – just more change brought on by the Barbell Economy baton.

Yes, consumers are being much more efficient, spending more online. Much more in fact. Dr. Ed points out that during May, “shopping over the Internet accounted for a record 27.6% of total GAFO merchandise, purchased in stores or over the Internet.”

How big a change is that? In percentage terms alone, substantial. It’s up from 10% and 20% during 1999 and 2011. Very quickly, we likely see that number hitting a third of all such purchases online. Highlights?

I noted the blowout numbers of Amazon’s Prime Day. Their orders surged more than 60% YoY. Some of the internal numbers are crazy: they sold more than 90,000 television sets, more than 215,000 rice cookers, and more than three times as many Amazon devices as it did during last year’s sale.

How is this really affecting shopping malls?

It is changing them: as Gen Y molds yet another industry into its preferred shape and size, with their own list of chosen amenities.

The younger gang likes entertainment, experiences and togetherness. In malls today, it is likely we continue to see department stores (the choice of the boomers) being replaced by activities which do a better job of driving shoppers to the centers and lifting overall mall sales. What areas would that be? Check the Gen Y stats: sporting-goods retailers, fast-fashion chains, supermarkets, gyms, restaurants, movies theaters and other types of real-time entertainment.

Remember – count people…and then watch where they are going.

In Closing

The Barbell Economy continues to chug along. Yes, I know it is repetitive but I say it because we must get in touch with it soon. The masses are greatly misunderstanding the data building to our collective benefit. They are too busy being scared of their own shadows, seeing almost every event as the next shoe.

This generational baton-passing will be the process in place for years to come, allowing for solid planning and risk management with far less stress and angst required.

Lest we assume otherwise, of course these improvements can never be expected to come in a straight line mind you with no interruptions. Instead, this is more about a consistency today – and into the next 20 or 30 years – which is overall, set to be better than the “non Barbell Economy” sectors.

I think it is fantastic that we have new all-time highs which almost no one paid attention to – further enhancing the long-term value of same. Yes, I do hope it sells back off a bit, sure to drive many chants of a “failed breakout” at all-time highs.

It’s exactly what happened in 1982…and then….everything changed.

More later.

Until we see you again, may your journey be grand and your legacy significant.