Supply, Demand, & Prices
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Shoppers are back! May retail sales figure reflects biggest surge ever
(16 Jun 2020) Futures were already heavily in the green early Tuesday morning on news that the Trump administration was going to float a $1 trillion infrastructure bill to spur the economy, then the retail sales numbers for May hit the wires. Expectations called a month-over-month gain of around 8%; instead, sales rocketed 17.7%—the highest monthly spike on record. Delving into the report, sales of motor vehicles led the charge, with that group jumping 44.1%. Restaurants also staged a remarkable comeback, with receipts jumping by 29.1%. Interestingly, even though the home improvement retailers remained open during the height of the pandemic, that segment also notched an impressive 16% gain in May. Within minutes of the report's release, futures doubled their gains on all three major indexes.
(16 Jun 2020) Futures were already heavily in the green early Tuesday morning on news that the Trump administration was going to float a $1 trillion infrastructure bill to spur the economy, then the retail sales numbers for May hit the wires. Expectations called a month-over-month gain of around 8%; instead, sales rocketed 17.7%—the highest monthly spike on record. Delving into the report, sales of motor vehicles led the charge, with that group jumping 44.1%. Restaurants also staged a remarkable comeback, with receipts jumping by 29.1%. Interestingly, even though the home improvement retailers remained open during the height of the pandemic, that segment also notched an impressive 16% gain in May. Within minutes of the report's release, futures doubled their gains on all three major indexes.
US month-over-month retail sales drops most on record
(15 May 2020) Take a look at the chart above representing month-over-month changes in retail spending dating back to 1992. Within the parameters of this data we have the tech bubble bursting, the financial meltdown, and any number of other adverse conditions. Then we come to the pandemic, with its accompanying lockdown. What a powerful visual of exactly what we are facing right now. Spending fell 16.45% from March to April, while US industrial production fell 11.2% for the month—also a record decline. Clothing sales, despite the existence of online shopping, fell 80%; electronics and furniture sales dropped by 60%. Even grocery stores, despite remaining open and in spite of the run on toilet paper, food items, and disinfectants, saw a 13% drop in sales. For what it's worth, the rest of the world is now poring through similar data, so we are all in this together. A further potential bright spot in the carnage: most economists believe that April will end up being the worst month, as stores slowly begin to reopen. Let the (muted) comeback begin. It may be tempting to buy some beaten down retail names, from Under Armour (UA, was $46 four years ago, now $6.90) to Macy's (M, was $73 five years ago, now $5.25), but we would hold off—just because the stores are reopening doesn't mean sunny skies are on the horizon. We should have ample opportunity to get back in as the situation begins to normalize a bit.
(15 May 2020) Take a look at the chart above representing month-over-month changes in retail spending dating back to 1992. Within the parameters of this data we have the tech bubble bursting, the financial meltdown, and any number of other adverse conditions. Then we come to the pandemic, with its accompanying lockdown. What a powerful visual of exactly what we are facing right now. Spending fell 16.45% from March to April, while US industrial production fell 11.2% for the month—also a record decline. Clothing sales, despite the existence of online shopping, fell 80%; electronics and furniture sales dropped by 60%. Even grocery stores, despite remaining open and in spite of the run on toilet paper, food items, and disinfectants, saw a 13% drop in sales. For what it's worth, the rest of the world is now poring through similar data, so we are all in this together. A further potential bright spot in the carnage: most economists believe that April will end up being the worst month, as stores slowly begin to reopen. Let the (muted) comeback begin. It may be tempting to buy some beaten down retail names, from Under Armour (UA, was $46 four years ago, now $6.90) to Macy's (M, was $73 five years ago, now $5.25), but we would hold off—just because the stores are reopening doesn't mean sunny skies are on the horizon. We should have ample opportunity to get back in as the situation begins to normalize a bit.
Inflation came in muted, and the markets love it
(13 Mar 2018) US consumer prices did rise in February, but less than in the prior month, and in the sweet spot from an inflationary standpoint. The consumer price index (CPI) rose 0.2% in February, following a 0.5% jump in January—remember how that spooked the markets? Excluding the two wildcards, food and energy, the numbers were precisely the same for February. For the previous twelve months, inflation is now sitting at 2.2%, which is well within the Fed's comfort zone. This put another nail in the coffin of any projected fourth rate hike for the year, which comforted investors. Futures rose about 185 points after the Commerce Department report was released.
(13 Mar 2018) US consumer prices did rise in February, but less than in the prior month, and in the sweet spot from an inflationary standpoint. The consumer price index (CPI) rose 0.2% in February, following a 0.5% jump in January—remember how that spooked the markets? Excluding the two wildcards, food and energy, the numbers were precisely the same for February. For the previous twelve months, inflation is now sitting at 2.2%, which is well within the Fed's comfort zone. This put another nail in the coffin of any projected fourth rate hike for the year, which comforted investors. Futures rose about 185 points after the Commerce Department report was released.
Can technology really tame inflation?
(16 Feb 2018) If there is one trigger word for the volatility in the stock market over the past two weeks it is this: INFLATION. After all, it was the unexpectedly strong wage-growth report that immediately got investors worried that the Fed would have to take dramatic steps to tame the (inevitable) coming inflation. That led to the bond selloff as the 10-year Treasury inched nearer to 3%, and the big market drop. But there's an interesting opposing viewpoint gaining steam out there. This idea that technology is putting downward pressure on prices, altering the supply/demand dynamic, and keeping inflation at bay. Amazon (AMZN) provides a great example of this theory. In the old days (like, a decade ago), increased wages meant more consumer spending, which meant more demand, which meant higher prices. But, thanks to technology, a company like Amazon can continue to undercut the competitors, forcing them to keep prices low. And the number of industries affected by the likes of Amazon, Alibaba, and Wal-Mart (with its jet.com purchase) continue to grow, increasing the impact. But what about non-consumer segments of the economy? Technological automation has revolutionized the manufacturing sector. Not only can parts be built quicker and in more locations (reduced shipping costs), industrial robots have replaced human workers, keeping the wages/inflation spiral in check. Finally, advances in communications technology now allow a small organization to compete with much larger competitors without spending anywhere near as much. Ultimately, can technology really reduce the effects of inflation on society? Time will tell, but early results are promising. We will discuss this topic in depth in an upcoming issue of The Penn Wealth Report.
(16 Feb 2018) If there is one trigger word for the volatility in the stock market over the past two weeks it is this: INFLATION. After all, it was the unexpectedly strong wage-growth report that immediately got investors worried that the Fed would have to take dramatic steps to tame the (inevitable) coming inflation. That led to the bond selloff as the 10-year Treasury inched nearer to 3%, and the big market drop. But there's an interesting opposing viewpoint gaining steam out there. This idea that technology is putting downward pressure on prices, altering the supply/demand dynamic, and keeping inflation at bay. Amazon (AMZN) provides a great example of this theory. In the old days (like, a decade ago), increased wages meant more consumer spending, which meant more demand, which meant higher prices. But, thanks to technology, a company like Amazon can continue to undercut the competitors, forcing them to keep prices low. And the number of industries affected by the likes of Amazon, Alibaba, and Wal-Mart (with its jet.com purchase) continue to grow, increasing the impact. But what about non-consumer segments of the economy? Technological automation has revolutionized the manufacturing sector. Not only can parts be built quicker and in more locations (reduced shipping costs), industrial robots have replaced human workers, keeping the wages/inflation spiral in check. Finally, advances in communications technology now allow a small organization to compete with much larger competitors without spending anywhere near as much. Ultimately, can technology really reduce the effects of inflation on society? Time will tell, but early results are promising. We will discuss this topic in depth in an upcoming issue of The Penn Wealth Report.
Inflation effect: CPI figures made futures swing 500 points to the downside
(14 Feb 2018) Before the Consumer Price Index figures came in Wednesday morning, futures had been up as much as 166 points; within minutes of the CPI showing inflation swirling faster than expected, futures dropped around 350 points—a 500-plus point swing. This is a great learning experience, and further evidence that the efficient market hypothesis is bunk. Opportunities immediately arise when the market overreacts, either to the upside or the downside. The headline Consumer Price Index number, which includes food and energy, rose 0.5% in January versus the expected 0.3% jump, making the trailing twelve months' rate 2.1% versus the 1.9% expected. That isn't much above the 2% inflation target the Fed wants. Certainly, the 2.1% rate isn't high enough for the Fed to change its methodical interest rate hike trajectory. Inflation will eventually exceed what the Fed wants, but expect this game to play out in years, not months. In the meantime, take the opportunities as irrational market reactions offer them up.
(14 Feb 2018) Before the Consumer Price Index figures came in Wednesday morning, futures had been up as much as 166 points; within minutes of the CPI showing inflation swirling faster than expected, futures dropped around 350 points—a 500-plus point swing. This is a great learning experience, and further evidence that the efficient market hypothesis is bunk. Opportunities immediately arise when the market overreacts, either to the upside or the downside. The headline Consumer Price Index number, which includes food and energy, rose 0.5% in January versus the expected 0.3% jump, making the trailing twelve months' rate 2.1% versus the 1.9% expected. That isn't much above the 2% inflation target the Fed wants. Certainly, the 2.1% rate isn't high enough for the Fed to change its methodical interest rate hike trajectory. Inflation will eventually exceed what the Fed wants, but expect this game to play out in years, not months. In the meantime, take the opportunities as irrational market reactions offer them up.