Shop 'til You Drop? (Feb 14, 2019)

Feb 22, 2019 | Richard So


The December retail sales data is in.

Today we received the December 2018 core retail sales data for the US and it came in weaker than expected, falling 1.7%.  This marks the worst sales number in nine years.  “Core retail sales” is meant to reflect true consumer behaviour, as it purposely excludes sales from automobiles, gasoline, building materials and food services.

We had mentioned in a previous blog post that the recovery from the Q4 bear market may take a path that grinds higher, by stringing together small pieces of positive news over time.  This is essentially what we have seen thus far in 2019, as investors were given a number of positives: a Fed that appears less biased towards raising interest rates, no escalation in trade war hostility, a good Q4 corporate earnings season, and strong unemployment numbers.  Based on these factors, the markets have been able to stage an impressive comeback, already recovering most of December’s losses after just six weeks of trading.

Having strong retail sales numbers would have been another piece of positive news that could have helped boost market sentiment.  As consumers represent roughly 70% of the US economic GDP, strong retail sales are an important indicator of economic and consumer health. Needless to say, a poor sales number was not expected, since December normally benefits from the holiday spending season.

Rather than try to rationalize away a number like this, it’s more productive to seek to understand it.  Did all the negative headlines, including the stock market collapse, government shutdowns and trade wars in December, cause people to be tighter on their spending?  Is the average American consumer really following these headlines?  If they were following, would it actually prevent them from going to their local Denny’s for breakfast?  Or could this just be a symptom of the growing trend of more holiday shopping being done over November’s Black Friday.

Whatever the reason, we should remind ourselves that this is just one data point and does not represent a larger trend. It is also a lagging indicator as it speaks to what has happened in the past, and not necessarily reflective of now. The stock market’s behaviour of December and January have been polar opposites, and perhaps January’s retail sales numbers will also have the same balancing act. Finally, Walmart and Macy’s are holding their quarterly earnings conference call over the next two weeks, therefore, investors will soon gain insight on current customer traffic from the actual retailers.

If there is any positive to take away from today’s news, it is that this number should not inspire confidence in Jerome Powell to raise rates in the short term. He needs an economy roaring on all cylinders in order to justify his rate hike rhetoric. And recall, talk of “overshooting” in rate hikes is how the bear market got started. We are in a paradoxical period, where bad news can be seen as good news.

In all, we do see this as just one data point amongst many. For traders this may be an event that sparks activity, however it should mean little for long term investors. That being said, investors should consider this as part of their homework - identifying what factors are changing and keeping their ears tuned to both positive and negative developments.