This week we received advanced retail sales for the month of July. From mine, this is one of the more important data points – as it sheds light on what we see with the relative health of the consumer. With spending making up 70% of GDP – any signs of slowing serve as a warning. Advanced retail sales accelerated 1.08% on the month – adjusted for seasonality but not inflation. Economists had been looking for a 0.3% increase MoM. However, June sales were revised to a decline of 0.2% after initially being reported as flat. As regular readers will know, it’s virtually impossible to glean anything from a nominal data point when viewed month-over-month. And whilst the media (and stock market) could not get over how ‘strong’ the data was – I would warn against jumping to conclusions.
A Time of Transition
Think of a time when you worked through major transition in your life. For example, maybe it was the end of a relationship; a deep loss; changing your career; starting a family; or relocating for work. Generally during times of meaningful transition there is a period of adjustment and uncertainty. And sometimes, the change will come with volatility. From mine, it’s possible the market’s wild behavior this week is representative of one in transition. However, it’s still early. Volatility in stock markets are typically associated with meaningful turning points… this posts explore more about what’s happening below the surface; and why I think the 20-year era of cheap money is drawing to an end.
So Maybe Valuations Matter?
When I made the difficult decision to reduce my exposure to large-cap tech earlier this year – I wasn’t sure how things would pan out. In the short-term – I looked foolish. These stocks surged higher without me. However, since then, large-cap tech is trading lower than when I sold it (on average). But is this a dip you should buy? I don’t think so – not just yet. The broader index is only 6% off its all-time high. That’s nothing in the larger scheme of things. I’m choosing to remain a little more patient – where I think the index could correct somewhere in the realm to 10-12%.
Quarterly Real PCE Up YoY… As Savings Fall
The market received three important data points this week – inflation, wages and consumer spending – and it was mostly good news. First up, inflation continues to moderate. The Fed’s preferred inflation index – Core PCE – showed prices increased at a moderate pace for June— confirming excessively high inflation is behind us. However, prices are still ~30% higher than 3-years ago… they’re just rising at a slower pace. Whilst inflation is important – I wanted to know if consumers are still spending? The answer is they are – and by whatever means possible. They are drawing down on their savings and ramping the use of credit cards – which has seen card delinquencies hit decade highs. But from equities perspective – higher spending is good news. This feeds the ‘soft landing’ narrative….
For a full list of posts from 2017…