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Retail Sales Surprise Collides with Coronavirus Concerns

June 22, 2020
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Monday Morning QB - Market Observations:

  • Relaxing Social Distancing Rules Sends Retail Sales Higher by Record 17.7%
  • Fear of a Spike in Coronavirus Cases Continues to Weigh on Markets
  • Federal Reserve Chairman Powell Tells Congress More Fiscal Stimulus Is Needed
  • Wealth Gap Widens Between the Employed and Unemployed as the Employed Are Stashing Away Cash
  • Number of Americans Seeking First-Time Unemployment Benefits Dipped Last Week, but Remained Stubbornly High 
  • Stock Market Volatility Appears To Be Confusing the Masses As Fear of Losing Money Competes With Fear Of Missing Out On the Latest Rally
  • Fiscal and Monetary Stimulus Keep the Bulls Looking to Add On Market Pullbacks
  • …While the Bears Look for Dips to Become Market Drops as the COVID-19 Case Count Continues to Rise

Monday Morning QB - Market Performance:

U.S. stocks recorded gains this week on the back of a record-setting retail sales report. The gain helped claw back a part of the previous week’s steep declines.

The technology-heavy NASDAQ Composite fared the best last week, rising 3.7% to 9,946. The Dow Jones Industrial Average rose 266 points to finish the week at 25,871, a gain of 1.0%.

By market cap, the large cap S&P 500 added 1.9%, while the midcap S&P 400 and small cap Russell 2000 rose 1.4% and 2.2%, respectively.

Reopenings Restore Demand – Lead to Record-Setting Retail Sales

According to the Commerce Department, retail sales in April recorded the worst drop since 1992, the statistic's inauguration year. Retail sales dropped a whopping 14.7% as the strict social distancing rules went into effect.

So, how sick of being stuck indoors were we as a nation?

As soon as the social distancing rules were relaxed, we chased down some semblance of normal. Retail sales across the board were strong. We got in our cars, and we went shopping. We ate at restaurants. We started to buy bigger ticket items as well. It appears that many of us got in our cars only to head to the car dealership to trade in the old car and drive off with a new one.

The 17.7% rebound in retail sales announced last week was more robust than anyone expected and, like April, set a record. April was the worst recorded month, and now May has claimed the best recorded month.

Retailers across the product spectrum believed the government stimulus helped boost sales but warned that continued employment improvement is the key to long term success.

People need wages to keep spending.

The Growing Disparity Between the Haves and the Have Nots

The retail sales report was another excellent sign that our economy is healing and will heal from the virus. The report also sheds light on the growing disparity of the recovery across America. The  "have and have nots", to me, found its basis in wealth, not income.

Sure, the larger the income, the easier it might be to save, but in my experience, many times, a more considerable income can mean a higher propensity to spend. More stuff but not more true wealth results. Some people look better, though actually are poor in terms of wealth.

The Coronavirus has, at least for a short period, changed the "have and the have nots" to "who has a job and who does not".

I know of doctors and dentists who have closed their practices down until it is safe to reopen. With their incomes gone, likely only temporarily, they still are in an unusual position for them. These are not the people that are accustomed to calling a bank and asking if their car payment can be put on hold for a few months.

At the same time, some home construction workers I know have all the work they can handle plus no need for their government stimulus checks. They are living on more income than they have had in years. The ability to earn during the pandemic with little need to spend has bloated their bank accounts.

With no summer vacations to pay for, dance lessons and summer camps canceled, more family dinners at home instead of eating out all the time, combined with the current furlough for date nights,  no outings to the movie theater and so on, the family checking account as ballooned. Many people are experiencing the highest savings rate in their lifetimes-even with online spending.

Hopefully, the savings rate will remain high even after the threat of the virus dissipates.

How long will the world remain upside down with colossal coronavirus economic disparities? (No one can answer this question by the way)

A Warning from Our Federal Reserve Chairman

The Federal Reserve continued last week to stay on their message from the week before. Fed Chairman Powell, in his testimony in front of Congress, shared his belief in the likely recovery process. He stated that if the virus remains reasonably well under control, recovery will take place in three phases.

The first phase was a sharp contraction, followed by the second phase (where we seem to find ourselves now), which is a bounce-back that includes a significant increase in re-employment. Last month’s employment numbers were shocking and encouraging, but we need to see more than a one-month trend.

Finally, the third phase can only occur when Americans regain their confidence in fully engaging in pre-COVID-19 activities, most likely dependent on a workable vaccine.

Chairman Powell shared his belief that segments of our economy will struggle to return to their old ways of activity (or to develop ways to adjust to the "new normal"), leading our economic recovery to stall for a potentially long time. Should this be the case, employment and economic activity will remain below the February 2020 highs.

The million-dollar question is, “What is the proper valuation of the stock market based on this hypothesis?”

Chairman Powell’s words found immediate credence in the retail sales figures. As stunning as the retail sales numbers were, they were still well below the spending levels pre-COVID-19 (February).

The environment described by our Fed chairman will likely lead to heightened volatility in the stock market with little “new” news to provide the why.

Patience is a Necessary Virtue Given Our Current Stock Market Cycle

Our investment discipline can get pushed around some in choppy market conditions while trying to avoid the next Red Flag Day. We do not call it "Red Flag Day Avoidance" for nothing.

Despite the recent volatility, we currently are seeing green flags and remain fully committed to the U.S. stock market. What is your investment discipline telling you to do?

According to data from Fidelity Investments, nearly 18% of all investors sold their entire equity holdings between February and May. However, for those aged 65 and older, that percentage was nearly double at over 30%.

Everything works in an up-trending Bull market. However, having investment discipline is essential in times of crisis. Emotions should not be the key driver of portfolio activity.

If you were one of the sellers between February and May and want to do better? If you want to understand how to build and maintain wealth through an investment discipline, give us a call, we are here to help.

(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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