You Gotta Feel It (It’s Electric!)

Tale of two cities 

Inflation is remaining in check – consumer prices only increased by 0.1% in January. On an annualized basis, that’s a 2.5% increase over the last 12 months, which is the biggest increase we’ve seen the fall of 2018. Price increases were mainly driven by the cost of living (rent), medical care, clothing, eating out, and flight tickets. The core inflation number that’s more closely followed, increased 0.2% for January but remained flat for its annual reading at 2.3% (it’s been at 2.3% for five months now).

Moral of the story: Inflation has been running low for years and I can’t foresee anything causing it to really ramp up in the near future. However, wages aren’t rising as fast as inflation – hourly wages have only increase 0.6% over the last year. If consumer spending is running the economy but consumers’ wages are increasing at a slower pace than the cost of the things they’re consuming…are you picking up what I’m putting down? 

The mix matters 

Retail sales only increased 0.3% for January and almost half of that was driven by a 2.1% increase in sales at home centers (like Home Depot or Lowes) that sell a lot of building supplies to small businesses (versus consumers). There was also healthy activity at bars and restaurants (usually only happens when people are feeling good about their financial situation). On the other hand, apparel stores saw sales decline 3.1% in January – part of this might be driven by the warmer weather causing muted sales for winter gear. Separately, the retail sales figures for both November and December were reduced by 0.2%, which aligns a little better with the commentary we heard from retailers regarding 4Q results.

Moral of the story: As mortgage rates are remaining low, housing demand has been picking up – so the increase in sales at home centers makes total sense. While most economists are expecting consumer spending to keep the economy chugging along in 2020, the measure of retail sales that’s used to determine GDP growth was basically flat for January. Fingers crossed that picture improves in the upcoming months.  

Earnings season continues 

Believe it or not, it’s still earnings season and results were largely in line with the consumer trends we see today. Brick and mortar apparel retailers struggled – Bed, Bath, and Beyond announced that sales fell more than expected and Under Armour reported a loss for the quarter. Restaurants are seeing the demand tailwinds from people eating out more – Restaurant Brands (Burger King parent company) reported better than expected quarterly results and Pepsi is seeing a healthy level of organic growth. The sharing economy is booming – Lyft beat expectations and is expecting profitability by 2021. The usage of data is exponentially increasing – Alibaba and Nvidia both beat expectations driven by healthy demand from cloud computing. Despite strong earnings, stocks were relatively flat for the week as coronavirus fears weighed on growth expectations. For example, Southeast Asia sailing cancellations could reduce Royal Caribbean’s 2020 earnings by over 11%. 

Moral of the story: More than 77% of the S&P 500 companies have reported quarterly results and 72% have come in ahead of expectations. Fourth quarter earnings for the market broadly should end up being slightly positive and earnings growth is expected to pick up in 2020 (as long as the coronavirus issues don’t last much longer) as many geopolitical uncertainties (trade wars, Brexit) have been resolved, which should provide a boost for the equity market. Plus, as part of its upcoming economic stimulus package, the White House is considering a tax incentive to encourage more Americans to buy stocks by making a portion of income tax-free for investment purposes. Absent a socialist agenda making its way into the Oval Office in November, the stock market could be set up for a nice year again in 2020.