What Did We Learn This Week? (03/17/2023) - STILL
Whenever you hear someone talking about the economy and they use the word “still”, your ears should perk up. “The consumer is still spending.” “Housing prices are still holding up.” “The labor market is still strong.” The word was a pet peeve of an old Portfolio Manager boss of mine who loved to respond to anyone using the word with the annoying quip, “Thanks for the history lesson”. He was saying that if you’re using that word, you are definitionally not looking forward and not focused on what is likely to be the change and the rate of change going forward, which is what stock analysts are supposed to do.
I’m hearing the word a lot lately. Below is a chart of Johnson Redbook Index which tracks the year over year growth of same store sales across the retail landscape.
Johnson Redbook Index
While it is true that sales are still up per store, the trend is clearly negative. The chart illustrates clearly the extraordinary, but waning impact of stimulus. The trend here is not your friend. Along with sales growth per store decelerating, so are the forecasts for growth going forward.
Defining the state of the consumer is tricky given the bifurcation between the high-end consumer and everyone else. Two things can be true. Auto and credit card delinquencies have been spiking while overall demand for services remains strong. The savings rate for the median consumer can be near all-time lows while accumulated wealth is near the all-time high. The issue is that the accumulated wealth is held by an inexorably shrinking percentage of the population. Sales for homes over $1mm in the suburbs of New York, where I live, are still seeing higher prices with a scarce inventory bringing multiple bids above the asking price. At the same time, inventories nationally are growing, and prices are down over 5% from the peak in June of last year. The key is to look at what the preponderance of the data is telling us, which is that broadly speaking, while slowly, the economy continues to move toward contraction led by weakness in housing, manufacturing, and the non-high-end consumer. At the same time, the Fed is no position ease when inflation and specifically wage related inflation is still way too high.
The labor market is where the “stills” are really piling up. To some degree, that is always the case as employment is the classic lagging indicator. But the strength of the labor market in this cycle has been extraordinary. One of our central themes at WealthVest is that we have a secular labor shortage in the US and throughout the developed world that is not going away outside of a deep recession. That said, I have expected for weekly claims to be trending up by now and they simply aren’t and obviously it’s been hard to identify a lot of weakness in the monthly Non-Farm Payrolls.
Economic precedent tells us that as companies see topline pressure, and they are, the next step is to preserve margins by laying off employees. As housing completions peak, and they are peaking, layoffs follow. So, I have little doubt that employment will weaken soon, because if it doesn’t, the Fed isn’t stopping with rate increases. The more interesting question is: how tight will the labor market remain even with a recession? That remains to be seen and is unknowable at this point.
What is still occurring in the economy doesn’t inform us of what will happen in the economy. While this cycle will rhyme with previous cycles, it will undoubtedly be different in many ways as well. As the great Stan Druckenmiller said, “Never, ever invest in the present.” Make your investment decisions based, not on what is still happening, but on what you think is most likely to transpire in the future. To that end, higher rates, tightening credit conditions, and falling fiscal support are all factors that we know will impact this economy going forward and not in a good way.
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Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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