Who's Buying?

Who’s buying?  Stocks ended Friday’s session higher despite abysmal retail data.  New technology sanctions threaten to derail last year’s trade cease-fire in the US-China trade war, a new unknown now added to an already formidable list.

N O T E W O R T H Y

Maybe not this month.  My regular readers know well of my obsession with consumption. Consumption, as in people like you and I going to stores and purchasing clothes, televisions, gasoline, food, airline tickets, etc. Are you starting to get where I am going with this?  If you don’t know, the US economy is highly reliant on retail activity with around 67% of US GDP coming from consumption alone.  In fact, as manufacturing and industrial production began to sharply decline in 2019 resulting from the trade war, it was the ongoing voracious consumer that kept the US economy powering forward when an increasing number of economists were predicting an end to the nation’s record-long economic expansion.  Nothing appeared to affect consumer spending in 2019 and consumer sentiment remained high throughout, which was an encouraging sign that perhaps the economy could expand yet further.  The Fed was onboard, lowering rates slightly, the Administration was onboard, signing the Phase One trade deal, and finally the market was on board, with the S&P500 logging a solid +28.88% growth for the year.  Evidence suggests that a healthy stock market encourages consumption, even if consumers don’t own stocks… go figure.

No one could have predicted the next chapter.  Sure, there were provisions for economic shocks in many elaborate academic models, but not one of the magnitude which we are now experiencing.  A rapid shutdown of virtually all businesses in order to flatten the growth curve of the pandemic would surely squash the economic growth many were hoping for in 2020.  We have all witnessed the empty streets and shuttered retail stores.  We see the empty dining rooms at our favorite eateries that are now take-out only.  Sporting events and live entertainment? Nope, although NASCAR did hold a race this weekend without anyone in the stands.  Good for moral but not so much for all the local businesses that thrive on the fans. Unemployment has spiked in all of the service related industries as businesses struggle to keep businesses afloat while waiting for the lockdowns to pass.  All of this was bound to have a negative impact on consumption.  Decades old retail establishments have filed for bankruptcy namely, Neiman Marcus, J-Crew, and JC Penney.  All of this seems obvious now, but how all these will change as restrictions are slowly eased is still a big unknown.

On Friday, the US Census Bureau announced its Retail Sales figure for April, which showed a monthly decrease of -16.4% for the month, the worst on record. Notable contributions to the decline were Furniture Stores (-58.7%), Electronics / Appliances Stores (-60.6%), Clothing/Accessories Stores (-78.8%), and General / Department Stores (-28.9%). The only category which actually grew last month was Non-store Retailers, AKA Amazon, which probably doesn’t surprise you.  in fact, I am sure that none of this is surprising.  So when will all of this turn around?  That remains the big mystery yet to be solved, but we have some clues.  WHILE YOU SLEPT, Fed Chairman Jerome Powell said in an interview that he expected the economy to begin to recover in the second half of the year, but a return to “normal” growth would not happen until later in 2021.  So a really, long “U”-shaped recovery, but a recovery nonetheless.  There is also a glimmer of hope in sentiment.  On Friday, the University of Michigan Sentiment Indicator beat estimates and came in at 73.7 up from its prior level of 71.8.  Breaking down the number, we should note that sentiment about current conditions improved from 74.3 to 83.0, though future expectation slipped somewhat from 70.1 for 67.7, but still better than economists’ estimates.  While many consumers are buying less today, confidence remains firm giving us all hope that things will someday, hopefully soon, get back to normal.

THE MARKETS

On Friday, stocks edged up slightly ending down for the week. Stocks started the session weak on trade fears and weak Retail Sales data but managed to recover from early-session losses on hopes that pulling back on restrictions could begin to get things back on track.  The S&P500 advanced, by +0.39%, the Dow Jones Industrial Average climbed by +0.25%, the Russell 2000 traded up by +1.57%, and the Nasdaq Composite Index rose by +0.79%.  Bonds rose and 10-year treasuries added +2 basis points to 0.64%.  Crude oil remains strong on larger than expected supply cuts adding +6.79% on Friday.

NXT UP

- NAHB Housing Market Index (May) is expected to come in at 34 compared to the prior month reading of 30.

- Atlanta Fed Raphael Bostic will speak today.

- In the week ahead we will get first quarter earnings announcements from a handful of retailers as earning season winds down.  Additionally, we will get lots of housing numbers, Leading Index, Markit Manufacturing and Services PMI, and minutes from the last FOMC meeting.  On Thursday, we will get the week Initial Jobless Claims number which is one of the most closely watched releases.  Please refer to the attached economic and earnings calendars for details.