The holiday season is in full swing. For many people, this typically entails spending time with family and catching up with friends. For investors, this holiday season means assessing the state of consumer balance sheets. Retail sales are a reliable indicator of this and one that should be closely monitored this season. The reason being that this holiday season, robust sales may prove to be a double-edged sword. Strong sales indicate that customers are still making purchases, which is positive for stocks on the first side of the blade. On the other side, robust sales may indicate that consumer spending remains strong and that the Federal Reserve should keep up its aggressive monetary policy, which entails raising interest rates.

The retail sales report of last week is a good example of this. For the month of October, retail sales exceeded forecasts, and because they were so robust, last week’s “Fed Pivot” chatter was soon put to rest. This followed a downturn in the markets and a rise in bond rates once more, albeit not to the extreme levels we had reached a few weeks earlier. Additionally, this led federal officials to publicly state that additional rate increases are required.

The Future of Retail Sales

It’s hard to tell where retail sales are going. One reason is that retail sales are not adjusted for inflation and so these numbers might not give us an accurate picture of how strong consumer spending is. The other reason is that many retail companies reported mixed earnings results last week. The more “premium” retailer types showed that demand has slowed and lowered their outlook for the next quarter. While other more affordable retailers showed strong sales growth and raised their outlook for the next quarter. So, while there is some pullback in spending at some retailers, there is growth in others. Do you see the confusion here?

In the end, the Fed will decide whether or not it believes that consumer spending is still strong. Regardless of their decision, the likelihood of a Fed pivot has diminished. Unless some unanticipated circumstance arises that forces us into a significant slowdown, a pause rather than a pivot is likely to come first.

Andrew M. Ochoa
Portfolio Administrator

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