Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Retail Boom or Bust

Feb 24, 2021

Governmental restrictions due to Covid have impacted all consumers and disrupted businesses beyond all expectations. Understandably, the continual announcements of projected health risks and new restrictions issued and then reversed in January have challenged business leaders as they prepare their employees and company for 2021. Then January’s retail sales report by the Bureau of the Census, U.S. Department of Commerce came as a complete surprise reversing three consecutive declining months in sales and popping up 5.3%. The surprising report exceeded most analysts’ projections. 2020 holiday sales were also a surprise increasing 8.3% over the 2019 season as online shopping replaced old school style of roaming scented malls with Christmas music. Despite a strong holiday season, fourth-quarter retail sales continued its downward trend during what is normally the strongest quarter of the year.

Analysts at Econoday provided this commentary:

“Nothing prepared us for January's great 5.3 percent monthly leap in retail sales, one that more than doubles Econoday's high estimate. January is one of the very lowest months and December the very highest month in total sales, factors that spell heightened distortion risks for seasonal adjustments.

That stated, monthly gains were posted across all categories in January, a month that saw a second round of federal stimulus checks lift the consumer. Electronics & appliance stores rose 14.7 percent, furniture stores were up 12.0 percent, and nonstore retailers up 11.0 percent. Restaurants posted a 6.9 percent gain that offers perhaps a glimpse of normalcy returning to the service economy.”

Even the Year over Year (YOY) change in January 2021 retail sales was positive, with an increase of 7.40% over the previous year. The change in sales was the biggest increase since September of 2011.

The below chart of retails sales YOY changes for the past five years illustrates how disruptive the combination of historic health policies and trillion-dollar stimulus programs has been on retailers. During the past five years, retail YOY changes rarely exceeded 3%. However, in the past 12 months, the YOY changes in sales ranged from -15% to +28%.

The challenge for investors in 2021 is determining what health policies government leaders will impose on businesses and then identify which industries will survive or even thrive under these policies. Corporate sales, growth, and profits this year will be directly impacted by changes in health policies by officials that seemingly are changing daily (sometimes within hours).

The surprised rush by consumers to spend this past January may be simply Déjà Vu of May 2020 when consumers spiked retail sales by 18.3% as trillions of dollars were sent to individuals and businesses thanks to the $2.2 Trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act signed into law on March 27. However, retail sales quickly declined after May’s spike and by October had negative monthly changes even during the holidays.

CNBC had the following insight on January’s retail sales:

“Electronics and appliances saw the biggest increase, up 14.7% for the month, while furniture and home furnishing stores were up 12% and online spending at nonstore retailers jumped 11%. Even food and drinking places, which suffered the worst during the pandemic, saw a 6.9% rise.”

Not so consequential, January 2021 retail sales increased within 45 days after Congress approved a $900 billion additional stimulus package. So, with the not so huge spike in January 2021 sales, the subsequent months will most likely decline but may not experience as much volatility as last year.

What remains to be seen is if Washington’s stimulus packages of more than $3 trillion (14.4% of US total annual gross revenue) along with Federal Reserve banking supplements and ultra-low interest rates will be enough to restore the US economy to pre-pandemic levels.

What Does This Mean to Me?

Today the S&P 500 reversed a steep 1.8% early market selloff to end the day with a positive gain of 0.13%. Institutional investors remain optimistic, and declines in share prices continue to be perceived as buying opportunities.

The index is just above its 20 Day Moving Average and safely above its 200 Day Moving Average. As mentioned in previous updates, staying above its 200 Day Moving Average is a positive indication for the market. We maintain our favorable rating on the US economy and stock market.

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