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Recently while flipping channels, I came across one of my favorite movies, Rocky. During Rocky’s match with Apollo Creed, he was knocked down repeatedly, and always got up. He was resilient. When the retail numbers were released this morning, I could not help but feel the consumer is a lot like Rocky. Though inflation is growing faster than wages, saving rates are approaching historical lows, credit card debt and interest rates are at all-time highs, and still the consumer keeps getting up. Retail sales grew .4% vs .3% estimate, and sales excluding autos and gas, grew at .7%, more than double the .3% expectation.
Ten of the report’s 13 categories posted increases, led by miscellaneous store retailers, which include florists and pet stores. Apparel and grocery stores also posted solid advances. Receipts at gasoline service stations decreased, reflecting cheaper prices at the pump. Auto sales barely rose, defying expectations for a strong increase.
The sales figures cap another likely quarter of solid economic growth and consumer demand fueled by a hardy labor market. While the retail report does little to reverse expectations the Federal Reserve will cut interest rates by 25 basis points next month, adding to evidence that the economy shows limited signs so far of slowing.
Now, the flipside of this resiliency is something that few experts are acknowledging. For the last few years, consumers have continued spending. Despite wages growing slower than inflation, credit cards and savings accounts kept consumers alive, and the economy is benefiting. Of course, much of what buoyed the economy was helicopter money from the Federal Government (taxpayers). Most of the freebies have been used and consumers will have to navigate without rescue packages that temporarily fattened the wallets of most Americans. Obviously, it helps that Jerome Powell has started the lowering of interest rates, but it could be too little, too late. Time will tell.
Major Index Performances (as of Thursday Close):
- S&P 500: The benchmark index rose about 0.44%
- Dow Jones Industrial Average: The Dow gained 0.87%
- Nasdaq Composite: The index rose 0.17%
Earnings season is upon us with third quarter results now being reported. As I wrote in last week’s market recap, earning expectations for this quarter were lowered significantly. Sixty-five of the S&P 500 companies have reported earnings, with 75% topping expectations. The Financial sector is leading the pack with 100% of the companies’ reporting earnings above estimates.
The Artificial Intelligence boom continues to lure investors. Taiwan Semiconductor Manufacturing Company reported a 54% rise in third-quarter net profit. The news helped the semiconductor sector rebound from earlier this week. Nvidia continues to hit record highs.
In other economic news, initial jobless claims fell to 241K, far below the estimated 259k. Continuous claims remained steady, as jobs are harder to come by. Headline industrial production surprised to the downside, falling 0.3% in September after August’s 0.3% gain. Manufacturing production declined 0.4% during the month (vs. +0.5% prior), short of the consensus expectation for a 0.1% decline. Durable-goods production declined 1.0% in September, largely due to lower output of aerospace equipment, vehicles, furniture, and electronics and appliances. Output of business equipment declined 3.5%. Most of that came from lower output of transit equipment, but production of information processing and industrial products fell as well. The decline in consumer-durables output, and the more persistent drop in output of business equipment, is further indications that restrictive monetary policy is weighing on some of the more interest-sensitive sectors.
Bottom line, earnings are expected to be positive based on lower expectations. The market is still trending higher, and unemployment is still relatively low. Yet, I believe there are challenges ahead, providing numerous reasons for some caution. Money markets rates have dropped, but still offer a nice yield as we seek new opportunities.
Have a wonderful weekend,
Your Portfolio Management Team
