Nov 22, 2022
Retail Sales Are Sending A Message To Investors
This Economic Statistic Has Much To Say
The recent price action of stock markets reflects a considerable level of hopeful expectations by investors that a Fed “pivot” to lower interest rates and monetary expansion is near at hand. Is there realistic economic evidence to support this optimistic view? Retail sales, a good proxy for consumer spending, have much to tell us as it is the major driver of developed economies.
The accompanying chart below demonstrates that US retail sales remain remains, perhaps surprisingly, strong. While the slope of its rise is falling, indicating weakening growth, retail sales remain positive and do not reflect inflationary conditions.
The Fed can be expected to abort its efforts to subdue inflation only when there is evidence of a significant economic slowdown (recession) that will serve to dampen inflationary pressures, Retail sales, and other key measures, such as the unemployment rate, have yet to provide a rationale for the Fed to change its current policy.
We expect evidence of a recession, and continued pressure on already declining corporate earnings, to become apparent in 2023. In the meantime, we expect further interest rate increases.
The divergence of investor expectations from economic reality raises the risk for equity markets.
The current bear market will eventually end. In the interim, we believe investors should focus on minimizing risk in anticipation of the opportunities that will be presented by the next bull market. Each bull market features a new group of leaders, some of which are already becoming apparent and are being added to our watch list.
Each month in the Global Investment Letter I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets.
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