Retail Sales, Spending & the Magnitude of the Rally

Yesterday, a weekly retail same-store sales report was better than expected, with a +0.6% monthly gain versus expectations of a -2.2% decline. The chart below shows the Johnson Redbook Same Store Sales Index on a year over year basis, and as you can see it recently climbed into positive territory. This index is a sales weighted index of same store sales, or sales in stores continuously open for 12 months or longer. It is broad based, and according to Bloomberg, it represents over 80% of the official retail sales data collected and published by the Department of Commerce. Just this morning the Census Bureau published the advance retail sales numbers for the month of September, and they were better than expected, but still fell by -1.5% for the month, and -5.7% over the past year. Much of the pullback from the prior month’s gain came in the form of Cash for Clunkers payback, as auto sales was the biggest contributor to the monthly decline.

We’ll continue to watch retail sales and consumer spending closely, as spending may hold the key to the duration and ultimate magnitude of the current bull market rally. If the stimulus that fueled the current cyclical rally can create a sustained upturn in spending, than there is a chance that a material healing in top line revenue growth could be in the offing. Stronger revenue growth could feed into better profits, firmer employment, healthier income and net worth, higher assets prices, and ultimately the creation of a self-reinforcing feedback loop that keeps this bull market humming for longer than most anticipate. This would be the best case scenario and we would love to see it unfold. But as investors, we need to constantly look forward with objective analysis and healthy skepticism. We are encouraged by recent numbers, but are also fighting against growing complacent regarding the recent improvements, particularly since some of the stimulus that has supported recent spending has already been withdrawn (Cash for Clunkers) or is scheduled to wind down over the next quarter (first-time homebuyer’s tax credit and the Federal Reserve’s Treasury purchases). Enjoy this rally, but don’t get too comfortable.