Demand more. Yesterday, resilient stocks traded modestly higher, tipping their hats to the real custodians of the economy: the consumer. Just a day after the stock markets’ worst day of the year, fear dissipated in response to stronger than expected economic numbers.
MY TWO CENTS
- A never ending appetite for stuff. My regular readers are probably tired of my constant reference to the consumer, who makes up 2/3 of the US Economy. The consumers are the most critical factor in the economic health of the economy. When consumers slow down their consuming, growth grinds to a halt… despite the shape of the yield curve or any other magical predictor of doom. Record low unemployment and rising, albeit slowly, wages ensure that consumers continue to make purchases. Another important factor in consumer behavior is confidence. When consumers expect good economic conditions to persist, they continue to demand goods. Sure low prices and more money to spend are important, but if consumers get spooked, demand weakens which is ultimately the real cause of a recession. The challenge for most economists is figuring out what impacts consumers' confidence. The Fed has recognized that there is a strong correlation between spending and stock market health and has done its level best to keep stock markets chugging along with hopes of extending the current economic expansion. Interesting fact: roughly only 50% of Americans own stocks, with the highest concentration of ownership in the wealthiest 10%. So the correlation is not due to stock owners using their profits to buy goods. As for wages, they hit an all time low for growth in the wake of the financial crisis and only began to climb slowly in 2013. Currently, wages are growing, but not nearly at the same pace as economic expansions in the past. What then is driving the consumer? Economists have yet to figure out the true source, however despite the barrage of headlines on trade wars, geopolitical meltdowns, breaking up trading blocks, legislative deadlocks, and violence, consumers keep on doing their thing: consuming. Perhaps Instagram, Pinterest, Uber Eats, and DoorDash combined with single click checkout has something to do with it. Walmart has certainly benefitted from the digital economy and repeatedly cited it in its earnings beat yesterday. Also, yesterday, the US Census Bureau released Retail Sales for July which showed a better than expected growth of +0.7%, up from last month’s revised figure of +0.3%. The strong figure was the primary driver for yesterday’s positive stock market move. Consumers are happy, and so are stocks… for now. This morning we will get a read on consumer sentiment when the University of Michigan releases its sentiment index.
- Trade tangle. What in the world is going on with global trade? I cannot recall a single critical earnings release that did not mention trade headwinds in the past few quarters. Central bankers have also all cited reduced trade as a root cause for economic toil. It was one heck of a wild ride for stocks this week as stock traders became re-acquainted with the yield curve and began to factor in global economic slowdowns. In the midst of all the volatility, discussions between the US and China appear to have completely broken down. Earlier in the week, stocks jumped on news that the Administration was delaying the onset of new tariffs set to take effect on September 1st, when in actuality only some items on the new list got a reprieve, as reported here in this note. China responded by threatening the US with countermeasures and President Xi accused Trump of backing off his commitments. Trump’s response? “There is a long way” the US can go with sanctions and that the “longer the trade war goes on, the weaker China will get”. He further lamented that the EU treats the US even worse than China. Still Trump claims that he will give Xi a call “real soon” to smooth things out. This, also despite his ratcheted up rhetoric on the conflict in Hong Kong, clearly to the dismay of China. Trade issues do not appear to be ending any time soon and with markets getting increasingly volatile, investors need to be careful.
THE MARKETS
Stocks remained resilient yesterday trading mixed to modestly higher on upbeat Retail Sales numbers bolstered by a strong result from America’s retailer Walmart. The S&P500 traded up by +0.25%, the Dow Jones Industrial Average climbed by +0.39%, the Russell 2000 fell by -0.4%, and the NASDAQ Composite Index slipped by -0.09%. Bonds continued their climb yesterday and 10-year treasury yields slipped by -5 basis points to 1.52%. The 2-year / 10-year yield curve that caused panic on Wednesday ended the day in the positive at +2 basis points, calming investors. 30-year bonds closed with a yield to maturity of 1.97% which is the bond's lowest yield… ever! Though the T-bond, as it is commonly referred to, is not the bellwether it once was (it has been replaced by the 10-year note), the record low yield for the long duration is sign of the times in which there is a growing store of negatively yielding sovereign debt around the globe.
WHAT’S NXT
- Housing Starts are expected to have grown by +0.2% month over month compared to last month’s decline of -0.7% and Building Permits are estimated to have grown by +3.1% compared to last month’s decline of -5.2%.
- University of Michigan Sentiment is expected to have fallen to 97.0 from 98.4.
- Next week is a light week of releases but will include the Fed Minutes from their last FOMC meeting, more housing numbers, manufacturing PMI, and the Leading Index.
- Deere and Company missed earnings by -4.5% in this morning’s pre-bell release. Wanna give a guess on the primary reason cited by the company?
Have a great weekend!