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Consumer Spending Continues to Fuel the Markets

February 22, 2021
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Monday Morning QB - Market Observations:

  • Stimulus Checks Juice Spending in Low to Middle-Income Families
  • Lumber Prices Soar to New Heights as Home Building and Improvement Boom Rolls On
  • Home Sales Up 23.7% Compared with the Same Time Last Year
  • Inventory of Homes for Sale Fell to Record Low
  • Bitcoin May Be the New Gold…Bitcoin Tops $50,000 Mark While Gold Declines
  • Oil Prices Spike from Texas Freeze

Monday Morning QB - Market Performance:

The major U.S. indexes took a pause last week, ignoring a strong retail sales report. The Dow Jones Industrial Average ticked up 0.1% to 31,494, its third consecutive week of gains. The NASDAQ reversed most of last week’s gain finishing down -1.6%.

By market cap, the large cap S&P 500 gave up -0.7%, while the mid cap S&P 400 and small cap Russell 2000 retreated -0.4% and -1.0%, respectively.

Consumers Continue to Defy Experts by Spending More - Retail Sales Surged 5.3% in January

Donald Trump's parting gift, the $900 billion Covid-19 relief package signed into law at the end of his Presidency, appears to have boosted the spending of low to middle-income America. The $600 per adult and child checks combined with an extension of additional unemployment benefits until mid-March have helped create a spending spree.

Consumer spending is the American economy's lifeblood, accounting for more than 2/3 of the U.S. economic output. With the increase in Covid-19 cases in Q4 2020, consumer spending was taking a hit, down all three months of the quarter as measured by retail sales. Purchases from stores, restaurants, and on-line typically experience upswings in the holiday quarter.

Fast forward to January, as reported last Wednesday, retail sales jumped a seasonally adjusted 5.3% over December's spending. This was the largest increase since June, which marked the beginning of some of our economy reopening. Much of the retail sector benefited from the latest retail sales jump. Home makeover products continue to be in demand, expressed in the new high for lumber prices. The "Comfy and Cozy" at-home trend continues!

Back to stimulus as a catalyst for retail sales for a sec- I have seen different percentages tossed about, but consensus suggests that roughly 88% of stimulus checks get spent versus saved. Spending today typically leads to a future, better than expected, retail sales report.

The Biden Administration is hard at work on how best to get their stamp on more stimulus. It does not seem like a question of "if" but "when" and "how much". The answer to these questions may come to light before the week is over.

When the money moves from planning to pockets, it is fair to say another jump in retail sales will soon follow.

Biden stimulus anticipation has helped stock markets reach new record highs so far in 2021. Hopefully, Biden stimulus will not be a "buy the rumor and sell the news" type event.

Price of Lumber Reaches Record Highs

One of the significant unintended consequences of the pandemic's "shelter in place" order has been the boom in housing and housing-related projects.

With the pandemic's restrictions taking away travel vacations and dining out, it led many Americans to look to other uses for their money. Those fortunate enough to maintain employment throughout this entire crisis and/or be well off while retired found themselves at home wondering what might make this situation more tolerable.

For some, the pandemic has led them to a new home. For many of us, "shelter in place" came with the realization we could improve aspects of our current house. For me, it was turning our room over the garage into a game room.

We have spent many a night playing pool as a family, cutting up and just enjoying each other's company. We moved from more tolerable to downright fun together, making memories during a pandemic and feeling blessed to be able to do so. What home projects have you done since the start of the pandemic?

Contractors, builders, home improvement stores, and the entire home improvement industry started off the pandemic in fear of a collapse. Fast forward to now, and their industry boom resembles 2007. Low mortgage interest rates combined with consumers with good balance sheets looking to buy new or fix up their existing homes have taken the housing industry to record-high lumber prices.

No matter the tree, wood used for framing, walls, cabinetry, trim, decks, or fences, all have surged to new highs in price. How far can prices climb? Again, home prices are rising the fastest since before the housing collapse, which ended in the Great Recession of 2008 - 2009.

The current run-up does not have to end in a housing market collapse.

Still, prices eventually will rise above affordability, and, hopefully soon, "shelter in place" will give way to leisure and travel getting us out of our homes. We have all been cooped up for a year—the desire to go anywhere will likely end the surge in home additions.

So, continue to enjoy your new homes, second homes, new additions, modernizations, new home offices, game rooms, media rooms, the new study, and yes, the new exercise room.

Now we can watch as we create a boom in the hospitality and restaurant industries and the travel and leisure industry.

So How Should One Invest Going Forward?

With the likely boom coming in the hospitality industry, should we all be loading up on the companies' stocks in the hospitality industry?

This kind of question gets beaten around during every crisis. Who will be the winners and who will be the losers? We have been doing this exercise since last March.

Honestly, how many of you saw the home-building industry going drastically higher at the start of the pandemic? I know I didn't.

Early in the crisis, our stock discipline led us to buy Kroger and NVIDIA, to name a few. Supply and demand-led us at the beginning of "shelter in place" to find the fruit in the market's gaming and grocery store sectors.

In my 25 plus years of experience, I have found the obvious choices in a crisis under-perform the less the obvious. I'm not saying that the leisure industry will not see a jump once "shelter in place" officially ends. However, the more significant jump may come from the market segments that are not on everyone's radar, such as chip-makers and home builders were last April.

Can you find the winners? We hope so.

Our discipline's basis, however, comes from following the money. Money is in constant motion, going out of this sector, stock or asset class, and moving to another sector, stock, or asset class.

We may not be first, but we will follow the money.

Supply and demand show the movements of capital, which is our favorite indication of what to buy and sell. Investor emotion will always overshoot on both the upside and the downside.

"Follow the money" is one of our “7 Rules to Successful Investing.”

This "Rule of 7" Represents Signposts pointing to the way to approach an Unknown Future!

Have a great week everyone!

(sources: all index return data from Yahoo Finance; Reuters, Barron's, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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