September retail sales increased 0.4% from August and is the third consecutive month over month (MoM) it has increased.  The 0.4% is substantially higher than August’s 0.1% monthly increase.  Even though retail sales have increased in six of the past nine months this year, overall total retail sales are still less than in previous years. 

The Year over Year (YoY) chart better illustrates the decline in retail sales.  After the huge decline in sales in early 2020, sales recovered only a few months later. However, when people realized the stay-at-home business model was going to be in place for the indefinite future, people spent a significant amount on home computers, furniture, and house remodeling for their new work/home lifestyle.  Consumer spending increased by over 100% YoY in the three combined months of March through May 2021 and continued to increase their spending every month through 2022.   Since then, spending has stabilized into slow increases each month which may be the result of people buying stuff at higher prices than people buying more stuff. 

The key result of people spending more each month is it supports economic growth by circulating more currency in the economy.  More money trading hands create profits at every transaction and increase the value of the US economy.  The flow of money through our economy is like fuel that keeps an engine running and the faster money circulates the faster the economy runs.  Since consumer spending represents 66% of all US spending with the other 34% spending represented by governments, corporations, non-profits, and international, it is important to monitor changes in consumer spending.  At this point, households are in good financial shape with more people working in the history of this country.

What economists have attributed to what should have been a recession in 1929 that turned into the Great Recession (1929 – 1946) was the lack of dollars being circulated.  The result of the Federal Reserve's monetary policy to reduce currency circulation to combat disinflation (prices declining) along with horrific fiscal policy by the Federal government produced a severe shortage of dollars.  People literally did not have dollar bills to spend.  The combination of counter-productive and ineffective monetary and fiscal policies prompted business layoffs due to slowing sales that were ironically due to people spending less. Less money circulating in the economy caused a horrible domino effect of bank failures, loan defaults, slowing business sales, and more layoffs.  Unemployment shot up to over 20% by 1931 and with fewer people working in the history of this country, fewer dollars were circulating through the economy.  Presidents Hoover (1929 – 1933) and Rosevelt (1933 – 1945) implemented federal programs to “save” Americans that exasperated an already spiraling out-of-control economy.   No one seems to connect that governments do not produce any economic value.  As it pertains to economic activity, all the government does is redistribute dollars already in existence by taxing those who have money to give to others.  As fewer and fewer people were working, tax receipts (referred to inaccurately as “tax revenue”) to governments declined which prompted tax rate increases.  From 1944 to 1951 the highest marginal tax rate was 91% and increased to 92% for years 1952 – 1953.  As everyone knows, when tax rates increase, they rarely or slowly decline even during good economies.

When President Reagan was elected, the top IRS marginal tax rate was 71%.  President Reagan (1981 – 1989) ran on a platform in 1980 that when the private sector (consumers and businesses) has more money, then economic activity will increase.  He advocated a massive tax rate overhaul to lower tax rates so the private sector would have more money.  This was a refreshing message as the US economy had been in a 15-year slump with failed government programs funded by high tax rates.  During the period from 1965 to 1980, the S&P 500 had a whopping compounded annualized return of 1.04%. 

Imagine the challenge President Reagan had in convincing his political colleagues that after over 100 years of confiscating more from consumers and businesses to fund their federal re-distribution programs, lowering the marginal tax rate will actually increase economic activity along with tax receipts by the government.  President Reagan’s confidence in the American people and business turned out to be correct.  He signed into law the Economic Recovery Tax Act (ERTA) in August 1981 which was the largest tax cut in US history.  He followed up with the Tax Equity Fiscal Responsibility Act (TEFRA) signed in September 1982 and the Tax Reform Act in 1986 which transformed the tax structure and the US economy.  The S&P 500 annualized return during President Reagan’s term was 14.15% or 1400% better than the annualized returns during the previous 15 years.

What Does This Mean to Me?

The Royal Swedish Academy of Sciences awarded this year’s Nobel Prize to Daron Acemoglu, Simon Johnson, and James Robinson for their studies on differences in prosperity in nations.  I must admit I was dumbfounded.  I couldn’t imagine being awarded anything and especially not a Nobel Prize on a theory that everyone instinctively knew already.  Their statement was:

• “Societies with a poor rule of law and institutions that exploit the population do not generate growth or change for the better.”

Boy did I miss a huge opportunity to win a Nobel Prize?  Can you imagine winning a Nobel Prize on a theory that when people are happy, they produce more!?!  I am not missing another opportunity and have started my own research for a Nobel Prize based on the proven theory of:

• “When the wife is happy, everyone is happy”.  

In the meantime, it is important to know we maintain our favorable view of the US economy and stock market.  If the economic engine continues to have fuel (consumer spending) it will continue to function and grow (another Nobel Prize thesis).  However, favorable economic conditions do not guarantee that all companies or industries will have the same level of profitability, and the reason for active portfolio management.  Our goal for our clients is to build their wealth by aligning our model portfolios with what we believe are the best sustainable profitable companies and adjust when conditions change.

Let us know your thoughts on this Weekly UPdate.  We also welcome the opportunity to meet with you to discuss your goals and ways we may be able to assist you and your family.