By John Persinos
Full confession: Whether in a physical store or online, I hate to shop. I have no patience for it. My wife does all the shopping for our family. But as an investment analyst, I keep a keen eye on retail sales figures. I'm profoundly aware of how shopping is crucial for the economy and stock market.
Since the end of World War II, any investor who bet against the desire of Americans to go shopping during a recovery ultimately lost the wager. Hence the time-proven adage on Wall Street: Don't bet against the consumer.
That's why you should be heartened by the latest retail sales trends. They point to robust economic growth this year. Goldman Sachs (NYSE: GS) has boosted its U.S. gross domestic product forecast to 6.8% for 2021, which suggests the bull market has plenty of juice left.
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The coronavirus pandemic hasn't gone away, but the easing of lockdowns and the roll-out of vaccines is putting consumers in a spending mood. Savings rates have been high during the outbreak, which means there's a lot of pent-up demand ready to spill into the economy. When it's eventually passed, fiscal stimulus should add rocket fuel to the mix.
In the interim, we'll continue to experience volatility amid pandemic-induced anxiety. Tuesday's roller-coaster ride is a case in point.
On Tuesday, the Dow Jones Industrial Average rose 15.66 points (+0.05%), the S&P 500 climbed 4.87 points (+0.13%), and the tech-heavy NASDAQ fell 67.85 points (-0.50%).
Stocks started trading Tuesday deeply in the red as investors worried about inflation and rising bond yields, but reversed direction after Federal Reserve Chair Jerome Powell's reassuring remarks about inflation. By the closing bell, the Dow had erased a 360-point deficit.
In a speech to Congress Tuesday, Powell said inflation was still "soft" and renewed the Fed's vow to maintain an accommodative monetary policy. Powell said it was unlikely that stimulus would ignite runaway inflation. He said the U.S. economy was "a long way from our employment and inflation goals."
In pre-market futures contracts Wednesday, stocks were trading lower, as investors awaited Powell's second day of testimony.
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Powell has determined that inflation appears to be under control (for now, at least). By his reckoning, modest inflation can be construed as positive, because it suggests a recovering economy.
The January shopping spree…
After a lackluster holiday shopping season, U.S. consumer spending surged in January 2021, with retail sales climbing 5.3% from the December total on a seasonally adjusted basis. According to advance estimates published by the U.S. Census Bureau, retail and food services sales reached $568.2 billion in January, as $600 stimulus checks burned holes in consumer pockets.
January's numbers elevate retail sales above levels compared to the same month a year ago. However, not all retailers have benefited. E-commerce has thrived, of course, but many physical retail stores have gone bust.
As Congress debates a second round of stimulus, let's not forget that we suffered extraordinary economic damage last year. Because of widescale business lockdowns to curb the COVID-19 outbreak, retail sales plummeted 14.7% in April, following an already historic 8.2% decline in March.
Before March 2020, the worst retail sales drop had occurred in November 2008, when sales declined by roughly 4% during the trough of the financial crisis and Great Recession (see chart).
In a related trend, home prices throughout the U.S. are rapidly climbing, due to low interest rates and lack of inventory. Appreciating home values generate a "wealth effect" among consumers, making them more confident.
Better-than-feared...
Also driving the stock market rally have been earnings surprises on the upside. In aggregate, companies are reporting earnings that are 14.6% above expectations, according to research firm FactSet. This surprise percentage is above the one-year (+11.9%) average and above the five-year (+6.3%) average.
The consumer discretionary sector (+45.3%) is reporting the largest positive (aggregate) difference between actual earnings and estimated earnings. The sector's outperformance is expected to continue in Q1 2021.
For the fourth quarter of 2020, the blended earnings growth rate for the entire S&P 500 is 3.2%. The blended year-over-year revenue growth rate for Q4 2020 is 3.0%. "Blended" combines actual results for companies that have reported and estimated results for companies that have yet to report.
If 3.2% is the actual earnings growth rate for the quarter, it will mark the first quarter in which the index has reported year-over-year earnings growth since Q4 2019. The recession is over, for earnings as well as the economy. The pace of the recovery is now largely in the hands of consumers.
The upshot: The economy is rebounding and appears to be on track for supercharged growth in 2021. With this bullish context in mind, our investment team has put together a new special report: "5 Red Hot Stocks to Own in 2021." These growth stocks should outpace the broader market this year and beyond. For your copy of our report, click here.
John Persinos is the editorial director of Investing Daily. To subscribe to John's video channel, follow this link. Send questions and comments to: mailbag@investingdaily.com
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