Markets make the news and not the other way around, no matter what we in the news business might have you believe (or what we might want to believe about ourselves).
After the Dow Jones Industrial Average completed its eighth-straight winning week, it would seem incongruous that equities and other risky assets would extend their 2019 advance in the face of seemingly dire economic reports. But that may be because the weakness on Main Street was a reaction to Wall Street’s earlier swoon in the final quarter of 2018.
Retail sales took a dive in December, the Commerce Department belatedly said last week, in a release delayed by the federal government’s shutdown. The drop of 1.2% was so far out of line with economists’ forecasts that some practitioners of the dismal science pronounced the government’s data to be simply wrong.
Philippa Dunne and Doug Henwood, who pen the TLR on the Economy advisory, point out the monthly retail sales release is perhaps the most revised report to come out of the government’s statistics mill. Even so, it was a shocker.
As a result of the sales shortfall, the Federal Reserve Bank of Atlanta’s GDPNow estimate of fourth-quarter U.S. economic growth was slashed to an annual rate of just 1.5%, after inflation, from 2.7%. That would be a major comedown from the third and second quarters’ respective growth rates of 3.4% and 4.2%.
The federal government shutdown, which started Dec. 22, just ahead of the final shopping weekend before Christmas, likely played a role in the stunning drop in retail sales. But the stock market, which was already in a steep slide, may have taken a bigger bite out of December’s spending.
As discussed in this column on Jan. 25, Goldman Sachs economists found that declines in stock prices today have a far greater impact on spending than in the 1980s. That’s because equities account for a far greater portion of assets, not only of the wealthiest 1% who account for 50% of household stockholdings, but also of the middle- to upper-middle classes. Bank of America Merrill Lynch economists, in a research note last week, also traced the decline in retail sales to the stock market selloff in December. Its tracking of BofA’s internal debit- and credit-card data showed spending at its lowest level since 2016, when the economy flirted with recession.
The good news, however, is that there are early signs from on-the-ground trackers that consumers’ spirits have since been lifted along with the Dow. Cornerstone Macro, led by veteran economist Nancy Lazar, finds its own proprietary measure of consumer confidence has almost completely reversed its previous plunge, which was mirrored in the reported slide in December retail sales. The more sanguine attitudes would be consistent with the $4.9 trillion increase in the value in the U.S. stock market since its Christmas Eve low, according to Wilshire Associates’ reckoning.
The holiday-shortened week should also provide more shutdown-delayed data. The December advance durable-goods report should show a strong gain, boosted by a jump in aircraft orders, which are lumpy from month to month. More telling might be January’s existing-home sales after December’s 6.4% drop to a three-year low. Pending home sales in December were down 20% from a year earlier, Morgan Stanley points out. The bank’s economists also note that depressed consumer-confidence readings, an after-effect of the stock-market slide, may weigh on January’s Index of Leading Economic Indicators.
What flipped the stock market more than anything was the Federal Reserve’s shift from interest rate hikes in 2019, first articulated by Fed Chairman Jerome Powell on Jan. 4 and made official at the Jan. 29-30 Federal Open Market Committee meeting. Minutes of the meeting will be released this week and may shed further light on the monetary authorities’ thinking. Concerns about a trade war, meanwhile, have eased as talks between the U.S. and China appear to be progressing, though Europe still faces myriad political woes, including the Brexit deadline in little more than a month. If anything, the resulting boost in the dollar ought to keep the Fed leaning away from restraint. That should be a positive for stocks, and in turn, spending.
Write to Randall W. Forsyth at email@example.com