August retail sales might not be the top thing on everyone’s mind as this sombre week winds down, but the data stole headlines all the same Friday as the Office for National Statistics (ONS) reported sales volumes fell -1.6% m/m in August—the largest drop in a year.[i] Even as petrol prices fell, rising prices in other categories—as well as high household energy costs—hit demand at all subsectors of non-food stores (e.g., department stores, clothing stores, household goods stores and other non-food stores).[ii] The pound fell to a fresh low, and commentators we follow warned the negative report is another indication that the UK economy is in recession (a broad economic contraction). That may well be, and it seems likely even if new Prime Minister Liz Truss passes her plan to freeze household energy prices this winter and next, households will still feel a pinch. Yet at times like this, we think investors benefit from stepping back and considering that markets are global—and if their portfolios are diversified amongst international stocks in proportion with each country’s weighting in a broad index like the MSCI World, the UK probably isn’t a huge chunk of their portfolio. That makes economic trends outside the UK worth a close look, particularly in America, which is about two-thirds of developed-world stock market value.[iii] There, we currently observe a phenomenon we call the pessimism of disbelief: investors’ tendency to emphasise bad news and hunt for negatives in news that would otherwise be good. We have long observed this mentality to reign around stock market lows, suggesting that investor sentiment in America is primed for a stock market rebound that would benefit globally positioned British and European investors. The coverage of Thursday’s US retail sales report is a prime example, in our view.
American retail sales resumed growing in August, following July’s (downwardly revised) -0.4% month-over-month slide with a 0.3% rise.[iv] That rise was subject to big positive skew from autos and big negative skew from petrol stations—both influenced mainly by price movements, as America’s Census Bureau doesn’t adjust retail sales figures for inflation. But those categories seemingly cancelled each other out, as retail sales excluding autos and petrol stations also rose 0.3% m/m.[v] Headline retail sales also rose 9.1% y/y, which—as many noted—outpaced August’s year-over-year inflation rate, implying sales continue to eke out some growth on an inflation-adjusted basis.[vi] Mind you, we think that is overly simplistic considering properly deflating retail sales would require squaring up the month-over-month sales growth and inflation rates in dozens of small categories, but we found the observation interesting all the same.
Not because it was a cheerful observation—rather, in typical pessimism-of-disbelief fashion, most of Thursday’s commentary didn’t offer positive reasons why inflation wouldn’t be eroding spending on goods and food service. Articles we read didn’t tout strong demand, nor did they express relief that falling petrol prices are freeing up more of people’s money for discretionary spending. Rather, much of the coverage centered on timing: Not only is August back-to-school month, which boosts sales of clothing and school supplies, but it is also typically when stores will slash prices in order to make room for holiday-season inventory. Accordingly, many commentators we follow credited deep discounting for sales’ seeming resilience, implying that the only reason consumers are buying more is that they are raiding clearance sales in order to pinch pennies.
Perhaps they are correct to some extent. Seasonal adjustment, the practice of adapting data series to avoid skew from holidays and recurring events, is supposed to account for the impact of back-to-school sales, but maybe it couldn’t capture discounting’s full effects. That said, we just aren’t so sure this is a bad thing—or at all surprising for stocks. Several general merchandise stores have reported the need to offer deep discounts in order to clear stockpiles of unsold goods.[vii] For about half a year now, we have heard much talk of big American retailers misjudging consumer demand when ordering merchandise, presuming pandemic-era shopping habits would carry over. So if the value of retail sales rose despite consumers flocking to the clearance section, that would imply stores have been able to clear a lot of this year’s supply glut, making way for a fresh start. It would also, perhaps, point to a larger inflation-adjusted rise in goods spending than people seem to project, although we won’t know for sure until the full consumer spending data come out later this month
Whenever the economic outlook gets shaky, we find many headlines dwelling on retail discounts as evidence households are having a tough time—today’s reaction seems like a very well-trod one. In our view, it is more of a sociological observation than anything else, as why and where people are shopping generally matters less to the economic data than the simple question of how much. In our experience, people often tend to get more bang for their buck early in economic recoveries—not unlike businesses’ continuing cost-cutting for a while after economic output hits its low. Doing more with less is a big recovery hallmark, in our view.
Moreover, for US stocks, all of this data parsing is pretty backward-looking. The trends dominating reactions to the retail sales report—inflation and potentially tepid demand—aren’t new. Judging from US stocks’ large decline in US dollars this year, they have been dealing with them and all of the associated recession talk all year. The question is whether there is fresh indication that things are now getting much worse in America than people have already anticipated, and we just don’t think there is.
From an economic and everyday life standpoint, we imagine this is cold comfort for UK investors. America isn’t Britain, and a separate ONS report showed half of households who pay for energy are struggling to afford their bills.[viii] But when translating economic news to investment decisions, we think it helps to remember that the UK represents just 4.2% of the MSCI World Index’s market value.[ix] The US? 70.0%.[x] Plus, US and non-US stocks tend to be very highly correlated, moving together much more often than not.[xi] Therefore, we see a high likelihood that as US stocks recover from the bear market (typically a long decline of -20% or worse with a fundamental cause) they have endured this year when returns are measured in dollars, they will help pull stocks in other countries along.[xii]
[i] Source: Office for National Statistics, as of 15/9/2022.
[iii] Source: FactSet, as of 16/9/2022.
[iv] Source: FactSet, as of 15/9/2022.
[v] Source: US Census Bureau, as of 15/9/2022.
[vi] Source: FactSet, as of 15/9/2022. “Inflation rate” refers to the headline US Consumer Price Index percentage change on a year-over-year basis. The Consumer Price Index is a government-produced measure of prices across the broad economy.
[vii] Source: FactSet, as of 15/9/2022. Statement based on quarterly earnings call transcripts in the Consumer Discretionary sector.
[viii] See Note i.
[ix] Source: FactSet, as of 16/9/2022.
[xi] Ibid. Statement based on the correlation between weekly S&P 500 price returns in USD and MSCI World Ex. USA Index price returns in local currencies, 15/9/2002 – 15/9/2022. The correlation coefficient is a statistical measure of the directional relationship between two variables. A correlation of 1.0 means they always move in the same direction, 0 means no relationship, and -1.0 means they always move in opposite directions.
[xii] Ibid. Statement based on S&P 500 total returns in USD. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
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