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Key Points:

  • May’s Retail Sales Report showed a historic rebound versus historic plunges in March and April.
  • We expect most economic data to normalize at lower levels and continue to stay volatile.
  • Central Bankers are providing historic liquidity to counter-balance economic weakness.

Retail Sales: Consumers shop even in the worst of times!

In last week’s blog post I highlighted the weaker than normal GDP trend we have experienced since the 2009 bottom. I expect that lower range to continue for the foreseeable future as more debt gets added to corporate and governmental balance sheets. But let’s talk about the consumer. Here and abroad, spending is in our DNA. The level of spending we do changes according to our confidence, but we spend right through even the worst of times.

As an investor in consumer trends via the most relevant brands, it’s my job to understand where and how consumers will spend so our investment portfolios reflect the winners. Earlier this year I highlighted how historic and bad the retail sales data was for March and April and that a mean reversion higher was expected. In today’s Retail Sales Report, we got that vertical rise as consumers started spending after a few months of home quarantine and nervousness. To be sure, this data will continue to be volatile and we should likely expect it to stay rangebound for the rest of the year, but the worst of the retail sales data is likely behind us. The reality in economic data and stock prices: historic data in one direction tends to be followed by historic data in the opposite direction. Once this happens, the datasets can normalize as the healing process continues. There could be less surprises from here now that the cat is out of the bag.


A look inside May’s Retail Sales vs April:

  • Wage pressures will likely continue as brands across categories keep hourly wages higher.
  • Margins should continue to be under pressure with higher wages and lower overall revenues.
  • E-commerce continues to be the most robust +30% YOY and +9% Month over month.
  • Sporting goods, hobby, book, and music stores +88% & +5% year over year.
  • Food services & drinking places +29%
  • Miscellaneous stores +13%
  • General merchandise stores +6%
  • Clothing & accessory stores +188% but still -63% year over year
  • Gas stations +12% but still down 30% year over year.
  • Electronics & appliance stores +50% but still down 30% year over year.
  • Furniture & home furnishings stores +90% while still being down 21% year over year.
  • Motor vehicle & parts dealers +44%
  • Total retail and food service +17% while being down 6% year over year

Things are slowly improving across retail sales but with very few exceptions, there’s still a long way to go to get back to normal retail commerce. The bad news, it’s slow and the good news, the rate of change still has a few more months of potential improvement before a more rangebound environment should occur.  With Covid-19 cases rising through the summer and as we enter Fall, I expect the brands with the most robust e-commerce capabilities and highest brand recognition and relevancy ratings to continue to take market share and be the beneficiary of further money flows.

Normalization will be a long process

When we remove the outsized gains from this mean reversion we are seeing now, the Retail Sales data should slowly recover over time offering solid opportunities for investors. You want to know how volatile this month’s report was? Clothing and accessories retailers reported a 188% gain off very low levels as stores began to re-open. Other stores like toys and sporting goods saw a gain of 88%. These are historic gains that are unlikely to be repeated in their size and scope. Next month’s earnings reports and management tone will be very interesting to hear. I suspect the forward-looking commentary from executives will continue to be overly cautious and not promissory given how much uncertainty there still is. Again, uncertainty and higher volatility are to be used in the same sentence for now.

Below is a great long-term chart showing Retail Sales and the fluctuations we tend to see. Clearly 2020 is a historic outlier and the data will eventually get back to having smaller monthly and quarterly moves. Given its summertime and consumers are still highly pent up, I suspect we will see a continuation in the positive trends of spending for a few more months. There’s still significant wood to chop to get back to “typical” spending levels. Given the high and prolonged structural unemployment I expect for the next 12 months at minimum, we should all expect last week’s blog theme called “stagnation” to continue. The great news: volatility in data and stock prices offers wonderful opportunities for investors.

Central Bankers are pumping liquidity into the system like never before

The amount and trajectory of liquidity in the system is a major driver of asset prices. When the spigot is open and expanding, asset prices perform very well historically. When liquidity begins to be withdrawn, asset prices tend to contract for a period of time. If you have been listening to our Federal Reserve and the Bank of Japan, ECB, and China’s central Bank, you will know every central bank has their foot duct-taped to the gas pedal and it’s currently pushed to the floor. Each time the world thinks they have no more tools; they introduce new ones. I think we all feel confident it will all end in tears one day but until we see any signs of the liquidity being withdrawn, the environment for risk taking seems to be positive. To be sure, liquidity is not the only driver of asset prices but with this amount of policy accommodation, the phrase “don’t fight the Fed” has never been more important for investors. Just a reminder, here’s what the Fed has told us thus far:

  • They will keep rates at the zero bound until at least 2022 – that should allow stock multiples to expand even if earnings are slow to ramp back up.
  • They have perceived unlimited firepower and appetite for asset purchases of all kinds when they see distress. Those include corporate bond ETF’s, now individual bonds, Municipal debt, and I suspect outright buying of equities will be the next announcement if there’s another equity swoon.
  • They are supporting the commercial paper market as well as money markets.
  • Essentially the Fed is the largest hedge fund on the planet and has an infinite time horizon and the perceived ability to use unlimited leverage. That’s a tough game to fight for short sellers.

With our Fed and all Central Bankers priming the pump with no end in sight and their dual mandate of full employment and 2% core inflation also nowhere in sight, we should expect the liquidity bubble to continue to support asset prices. That does not mean there won’t be periods of scary virus or economic and personal hardship headlines, however. Just remember, there’s still trillions of dollars sitting in cash and earning nothing, plenty of investors who sold shares lower in the panic and who missed this epic rally and they are now looking to get re-engaged. Then we have a White House that says, at least for now, even if/when the virus comes back, the nation will not shut down again. Candidly that sounds like a great, positive headline but just because the economy is open doesn’t mean consumers won’t shelter more at home and continue their e-commerce purchases if there’s risk of contraction of Covid. The situation will stay fluid for the rest of the year, and that should keep volatility elevated and spasmic and continue to offer active investors and traders’ decent opportunities to capture gains. And I haven’t even touched on the potential for increased volatility tied to the elections yet! More on that in a future post.

The Bottom Line:

Here are some bottom-line takeaway points for investors to consider:

  • The historic drop in all economic data had to mean revert eventually. The process has begun.
  • Spending money on things we need and want is in our DNA, the longer we abstain, the bigger the ramp when we normalize. We saw that with today’s Retail Sales report.
  • We should see a few more months of improvement followed by rangebound data.
  • Central bank liquidity will remain at historic levels for the foreseeable future.
  • Given so much angst about markets and high cash levels, dips should likely continue to be bought.


This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.