The American Shopper Rides to the Rescue
Rising cases of coronavirus should be weighing on the stock market, but the latest retail sales data crushed expectations, sparking a rally. Like the 6th cavalry in the final reel of John Ford’s Stagecoach, the U.S. consumer has ridden to the rescue.
However, don’t expect the retail sector to repeat its performance anytime soon. As I explain below, May’s figures were an anomaly. I’ll show you ways to position your portfolio in these uncertain conditions.
The Census Bureau reported Tuesday that U.S. retail and food services sales jumped 17.7% in May from the previous month, a record increase as consumers trekked back to reopened stores that had been shuttered for months due to the coronavirus pandemic. The increase far exceeded consensus expectations that sales would rise 8% from April (see chart).
The latest retail data cheered investors Tuesday, sending the three main U.S. stock market indices into the green. The Dow Jones Industrial Average gained 2.04%, the S&P 500 rose 1.90%, and the tech-heavy NASDAQ climbed 1.75%.
In trading Wednesday morning, stocks were mixed and struggling to gain traction as coronavirus cases continued to rise in hot spots throughout the country. As of this writing today, the U.S. has racked up more than 2.1 million cases and more than 117,000 deaths, with the pandemic not waning but intensifying in several states.
Any happy talk you may hear about the pandemic is contradicted by the evidence. Arizona, Florida and Texas all reported their highest daily increases in new COVID-19 cases on Tuesday.
Let’s put the retail data for May into context. Retail sales last month were down 6.1% compared with the same month last year. We’re experiencing extreme volatility and it’s unlikely to abate as investors remain sensitive to any whiff of bad news. Last Thursday’s 1,800-point plunge in the Dow is instructive.
U.S. retail sales fell 16.4% in April, which for the second consecutive month was the largest monthly decline since the Census Bureau started the data series in 1992. The figures for June are unlikely to mimic the spike in May.
Sales so far this year are still down 8% from pre-crisis levels. Pent-up demand, federal stimulus checks, and more generous unemployment benefits fueled sales in May as states lifted quarantines. But further stimulus is bottled up in Washington, where lawmakers are disinclined to provide more. Restaurants, airlines, hotels, cruise ships, sports leagues, entertainment venues, and legacy department stores will continue to suffer into the foreseeable future.
When the pandemic is over…
Longer term, I’m far more optimistic. In the U.S., consumer spending accounts for about 70% of gross domestic product, providing the growth engine that has pulled the country’s economy out of most downturns for the past seven decades.
America’s love affair with shopping will certainly outlast this crisis. The retail sector will emerge from the pandemic in reconfigured but even stronger shape, with the e-commerce innovators in the vanguard.
The pandemic is serving as a dry run for breakthrough technologies in e-commerce. We’re seeing the inclusion of ultra-sophisticated technology, notably artificial intelligence and the Internet of Things, with online shopping. The results include features such as visual search tools and “deep learning” capabilities that make it faster and easier for shoppers to find and buy what they want. Social distancing due to the coronavirus outbreak underscores the desirability of these retail technologies.
The post-COVID retail winners already are coming into focus. Major retailers with strong online footprints are reaping the rewards of the stay-at-home culture. They’re reporting better-than-feared earnings results and ramping up employment to meet soaring demand from consumers.
Many of these retail stocks are relatively cheap. There’s an additional benefit to buying stocks of inherently solid companies when they’re undervalued. Not only do you get exposure to the improving fundamentals that push prices higher over time, but in the short to medium term, you’ll probably enjoy an extra bump from mean reversion.
This pandemic will end one day, but it’s not over yet. Fear of Missing Out is stoking irrational optimism, a dynamic that invariably proves to be a bearish contrarian indicator. Ironically, this unwarranted optimism is encouraging politicians to ease up on stimulus just when it’s needed.
Keep your powder dry with ample cash reserves, remain patient and, for the time being, circle the wagons. The cavalry doesn’t always show up.
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John Persinos is the editorial director of Investing Daily. You can reach him at: firstname.lastname@example.org