Retail Sales and Georgia’s Senate Races

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Retail Sales and Georgia’s Senate Races

Two issues to discuss with you:

#1: Today’s US Retail Sales report was a touch disappointing, so let’s talk about it. Of all the topics Jessica and I discuss every day in preparing these notes for you, we’re spending by far the most time considering the health of the US consumer. As much as we’re bullish on cyclical equities, as outlined in our “Markets” section today, consumer spending in the coming months is clearly the Achilles heel of our thesis. If this starts to roll over, markets will start to discount the rosy 2021 earnings estimates that anchor current equity market valuations.

Good news (1): Retail Sales have recovered entirely from the pandemic-related declines of earlier in the year. As the chart below (1992 – Present) shows, this snapback has been far faster than the 3 ½ years it took Retail Sales to recover after the Financial Crisis. On top of that, the growth trajectory hasn’t really slowed this year the way it did in 2000 – 2002. (Note: Y axis uses a log scale).

Good news (2): even though October’s comparison to September sales was only +0.3 percent, on a year-over-year basis we’re still running +5 percent (as we were in September). As the following 1993 – present chart of year-over-year changes in Retail Sales shows, this is a reasonable run rate for the early part of a recovery. Put another way, while that V bottom doesn’t look like it’s been completed filled, today’s Census Bureau report showed that 2020-to-date Retail Sales are actually the same as 2019’s 10-month totals ($5 tn in both cases).

As for what worries us with respect to Retail Sales, 3 points:

  • At a data level, there are many cross currents to consider. On the positive side, consumers have altered their spending habits in ways that boost Retail Sales numbers. Airplane flights and hotel stays are not in Retail Sales, for example, but dining out and online shopping are. On the downside, we’re seeing many US cities slowly shut down, and you can’t make a sale if the store or restaurant is closed.
  • At a macroeconomic level, we still have high unemployment, low levels of labor force participation and consumer confidence, and rising virus case counts that could limit near term improvement for these drivers of incremental Retail Sales.
  • In terms of Retail industry fundamentals, November and December 2019 were both really good months, with comps of 3.5 percent and 5.6 percent respectively. Could Holiday 2020 really show positive comps to Holiday 2019 in terms of aggregate Retail Sales? Jessica recently showed you some NRF and Deloitte survey data that says “absolutely not”…. But we’ll see how it goes.

Summing up: since US retailers are going all-out to front load Holiday 2020 into November, we believe this month’s Retail Sales will be good enough to keep markets confident in a continued US economic recovery. December is another story, however, but by then we should be well into the initial phase of vaccine distribution and less focused on near term economic datapoints.

#2: Control of the US Senate. The US election cycle isn’t quite over, because Georgia will decide early in 2021 on its 2 Senate seats. If Democrats win both, the party will effectively control the upper house. If they don’t win both, Republicans will hold the Senate, likely limiting President-elect Biden’s ability to enact tax increases, wide reaching regulatory reform and other actions markets might find troublesome.

Joe Biden won Georgia by a thin margin (14,000 votes on 5 mm cast), but the state has not sent a Democrat to the Senate since 1996. You’d therefore think the GOP has the edge here, and that’s what the PredictIt odds say as well:

  • The odds for both races favor the Republican candidates by 74 – 76 percent versus 24 – 30 percent for the Democratic candidates.
  • The PredictIt contract for Senate control in 2021 is currently priced at 82 percent for the GOP and just 21 percent for Democrats.

Summing up: the US will almost certainly have a “gridlock government” next year, which markets are taking as a positive setup.