Finding the silver lining
After the dismal December retail sales report, investors have been awaiting the January numbers, which we saw on Monday this week. I’ll give you the bad news first. The December numbers were actually revised further downward to -1.6% (compared to the initial -1.2% number), which is the biggest drop in retail sales since September 2009 when we were clawing back from the GFC. Now the good news. Retail sales increased 0.2% in January, which is higher than expected, driven by sales for building materials and discretionary spending. Compared to January last year, retail sales actually increased 2.3%.
Moral of the story: January retail sales tend to be lower than those in December given the seasonality of holiday shopping at the end of the year, and the strength in the January sales number makes it seem like December was somewhat of an anomaly, which was generally the consensus from most of the market anyway so stocks didn’t really move up on this news. However, if the strength in January had been absent, I bet markets would have moved down because of the December revision.
This week we saw reports for consumer and producer prices, both of which are pieces of data used to gauge inflation. Consumer prices increased for the first time in four months in February, but increased at a fairly muted pace, rising only 1.5% (compared to the ~2% target inflation the Fed likes to maintain). This was the smallest gain in consumer prices in almost two and a half years. Producer prices only increased 0.1% in February.
Moral of the story: Price stability is part of the Fed’s dual mandate and their target inflation, measured by the core personal consumption expenditures (PCE) price index, is two percent. The PCE increased 1.9% in December, but based on consumer and producer prices, it seems like inflation is going to continue to remain in check due to slowing growth in the US and globally. Unless the PCE starts climbing above 2%, we shouldn’t see the Fed raise rates to act on this mandate.
Making a comeback
After closing lower last week, stocks closed higher this week as the market digested fairly in-line economic data and renewed optimism around a trade deal with China. Stocks, in general, have made quite the comeback from their lows in December, and unless some markedly negative news comes out to shake up the macroeconomic environment (negotiations with China or North Korea, Brexit, etc.), the market should continue moving upward, following its momentum over the last couple months.
Moral of the story: When stocks rally as much as they have since Christmas, investors generally get antsy – prices seem potentially too rich in the context of slowing global growth. However, stocks still haven’t reached the highs we saw at the end of September last year. Once we reach those levels again, it will be time to start seriously thinking about valuations. But by then it will be earnings season again and we should get a good read on the economy that will help validate valuations.