Parsing Pessimism on Retail Sales

Amid a quite volatile week for stocks, investors continue hunting for hints at which way stocks will go. In the very short term, this is—of course—unknowable: Volatility cuts both ways, and it both starts and stops for any or no apparent reason. But over more meaningful periods, as stocks weigh fundamentals, they move on the gap between expectations and reality over the next 3 – 30 months. As bull markets begin, those expectations are colored by a phenomenon we call the pessimism of disbelief: investors’ tendency to emphasize bad news and hunt for negatives in news that would otherwise be good. While we can’t know now whether stocks’ latest rocky spell is merely a brief interruption of a nascent recovery or another leg down to a more W-shaped bear market low, that pessimism abounds today. The coverage of Thursday’s US retail sales is a prime example, in our view.

Retail sales resumed growing in August, following July’s (downwardly revised) -0.4% month-over-month slide with a 0.3% rise.^[i] That rise was subject to big positive skew from autos and big negative skew from gas stations—both influenced mainly by price movements. But those canceled each other out, as retail sales excluding autos and gas stations also rose 0.3% m/m.^[ii] Headline retail sales also rose 9.1% y/y, which—as many noted—outpaced August’s year-over-year inflation rate, implying sales continue to eke out some growth on an inflation-adjusted basis.^[iii] Mind you, that is overly simplistic considering properly deflating retail sales would require squaring up the month-over-month sales growth and inflation rates in dozens of small categories, but the observation is interesting all the same.

Not because it was a cheerful observation—rather, in typical pessimism-of-disbelief fashion, most of Thursday’s commentary didn’t offer positive reasons why inflation wouldn’t be eroding spending on goods and food service. Articles didn’t tout strong demand, nor did they express relief that falling gas prices are freeing up more of people’s money for discretionary spending. Rather, much of the coverage centered on timing: Not only is August back-to-school month, which boosts sales of clothing and school supplies, but it is also typically when stores will slash prices in order to make room for holiday season inventory. Accordingly, pundits credited deep discounting for sales’ seeming resilience, implying that the only reason consumers are buying more is that they are raiding clearance sales in order to pinch pennies.

And, well, perhaps they are correct to some extent. Seasonal adjustment is supposed to account for the impact of back-to-school sales, but maybe it couldn’t capture discounting’s full effects. That said, we just aren’t so sure this is a bad thing—or at all surprising for stocks. Several general merchandise stores have reported the need to offer deep discounts in order to clear stockpiles of unsold goods. For about half a year now, we have heard much talk of big retailers misjudging consumer demand when ordering merchandise, presuming pandemic-era shopping habits would carry over. So if the value of retail sales rose despite consumers flocking to the clearance section, that would imply stores have been able to clear a lot of this year’s supply glut, making way for a fresh start. It would also, perhaps, point to a larger inflation-adjusted rise in goods spending than people seem to expect.

Whenever the economic outlook gets shaky, headlines dwell on retail discounts as evidence households are having a tough time—today’s reaction is a very well-trod one. In our experience, it is more of a sociological observation than anything else, as why and where people are shopping matters less to the economic data than the simple question of how much. Heck, people often tend to get more bang for their buck early in economic recoveries—not unlike businesses’ continuing cost-cutting for a while after economic output hits its low. Doing more with less is a big recovery hallmark.

Moreover, for stocks, all of this data parsing is pretty backward-looking. The trends dominating reactions to the retail sales report—inflation and potentially tepid demand—aren’t new. Stocks have been dealing with them and all of the associated talk all year. The question is whether there is fresh evidence that things are now getting much worse than people have already anticipated, and we just don’t think there is.