BCJ Weekly Market Commentary, Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Retail sales were the theme of this past week. The reason for retail being front and center is extremely important. The government has (for good reason) backed off deep injections of cash through quantitative easing, and it has been discussed numerous times and in many ways that the US consumer is the biggest reason for the expansion at this point.
The headlines declared retail victory: Long Live the US Retail Market!
Business investment is low, interest rates are low, and borrowing is up…again. So what does the seasonally adjusted retail report mean? If we take it at surface level, the numbers are much better than expected. While economists had expected only 0.8%, the Census Bureau reported a seasonally adjusted sales of 1.3% higher than March.
The question to ask is what is seasonal adjustment? It depends on which year, which month, which holidays are in the month, and what the statisticians want to portray. Everyone wants data that will move the needle on the market up or down instead of the range in which we have been trading (around 2045 to 2100 for the S&P 500). The tug of war between buyers and sellers in the market continues to play out, and it is likely that this pullback in the last three weeks is largely a normal regression.
Let’s go back and examine what we can really see in the retail marketplace. After all, it was a very big reason for all the ups and down of the past week. What does it look like in a long-term timeframe? It honestly looks as though the uptick is not all that informative. This is the seasonally adjusted month to month change in retail sales for the last 16 years (shaded areas are the recessions).
According the Census Bureau’s report yesterday, the actual April total sales was $450.89 billion, versus $460.08 billion in March. It is only seasonal adjustments that gets the positive number. Based on the Census Bureau’s reporting, the data point (April’s increase in Retail Sales) is actually not all that informative. The market is wrong to pay attention, but the whole trend means much more than one month’s data.1
Are consumers spending their own money or are they spending money they do not have? Here is a picture of US total Debt (orange) compared to both percent of household disposable income and also the long term treasury interest rates. Perhaps this is one of the reasons the Fed is a little hesitant to raise rates too fast.
For reference, we were only a little over 4% lower than the total household debt that existed in 2008. Interest rates rising would significantly affect the consumer’s behavior, and despite the low interest rates on a long and short term basis, savings rates are higher than they were during the years leading up to the debt crisis of 2008. Here are what savings rates look like.
It is possible that more people would save if there were interest rate incentives to save. However, that would be a difficult thing for our stock market to absorb since the consumer is clearly the driver in this portion of the expansion.
Government spending has slowed and the consumer is supposed to take over, but the consumer is very sensitive to rates. The chart below displays how it is looking on that front. The red represents government debt outstanding, blue is consumer debt, and the green displays a further projection of debt. These are all compared to the orange line which represents GDP.
What does this mean? Retail sales do matter. However, the retail monthly report is not all that telling. The earnings of major retailors was much more indicative. The numbers were not good and the market was a bit befuddled by this contradiction. That was a huge reason for ups and downs last week and will likely be a theme going forward as the great wresting match over the economy continues.
Until data points give clear indicators, we are likely to remain in the trading range that we have been seeing in the past month. There will likely continue to be quite a bit of focus on the Fed and the Brexit vote in June, as well IMF forecasts and all things data. In other words, it is looking very much like we are in the late stages of this bull market. Macroeconomic themes are going to be big inputs that will drive markets. Having strategies in place that look at the fundamental and technical side of both underlying assets and macroeconomics is so important at this point in the game.
1-Advance Monthly Sales for Retail and Food Services April 2016. US Census Bureau. May 13, 2016 [5/13/16]
Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated.
BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 16-165