Good News is Bad News Again

There is a peculiar relationship between investors, economic news, and the major media. Investors are trying to predict the future of the stock market based on economic data being released, and the major media, whose only goal is to attract viewers, interpret stock market activity based on their opinion of what investors are thinking. It gets really weird and convoluted when investors are monitoring what major media is reporting and adjust their investment strategy accordingly.

It reminds me of the story of the town's watchtower keeper adjusting the tower's clock every morning based on the time he sees on the clock inside the donut store when he stops for coffee. All townspeople set their clocks and watches based on the clock on the massive watchtower that is actually based on the battery-powered clock in the donut shop.

Today, the US Census Bureau reported that retail sales increased 0.7% month over month (MoM), which was above what analysts had projected following an upwardly revised 0.8% increase in August sales. The good news is the retail store category had the biggest increase of 3% in September, followed by non-store sales of 1.1%. Even though the US Census Bureau does not adjust for inflation, the fact is consumers are spending more, which is surprising to analysts who predicted declining retail sales due to inflation and concerns about the economy. The continued upward trend of retail sales since April is positive news for retailers as they prepare their stores for the holiday season.

2023 is heading into the holidays with much better fundamentals with consumers and retail sales. Last year, consumers were struggling with aggressive interest rate hikes and fears of analyst warnings of a pending recession. Retail sales began to falter in May 2022, two months after the Federal Reserve began raising the discount rate, and retail sales monthly changes declined four of the next seven months leading into the holidays.

Nonetheless, holiday retail sales exceed the previous year's sales and forecasts. Forbes reported on December 30, 2022, the following on 2022 holiday sales:

"According to Mastercard SpendingPulse, which tracks sales across all payment types., holiday retail sales increased by 7.6% from November 1 to Christmas Eve. And shoppers were spending more in many categories – restaurant spending was up 15.1% compared to last year, clothing sales increased by 4.4%, in-store shopping was also up and saw an increase in sales of 6.8%, online sales increased by 10.6%, while department stores only had a modest increase of 1% over 2021."

The stock market opened slightly down this morning on the solid retail sales news, and the major media interpreted investors supposed mild reaction to strong retail sales as an indication of their underlying concern the Fed Reserve may raise rates. The good news is bad news again. The media reported today that good economic data may lead to the Fed raising interest rates, which is bad news according to the media. However, it doesn't make sense that investors who want stock prices to rise, which is the result of increasing sales, would shun positive news that consumers are spending more. The media will spin the storyline for the next several days that investors' reaction to strong retail sales is due to their fears the Federal Reserve may interpret the news as a need to slow the economy by raising interest rates.

However, this logic also does not make sense. First, the US economy is not, by any stretch of one's imagination, on the verge of hypergrowth and rapidly rising inflation. In February, the Congressional Budget Office (CBO) stated in its report:

"The [US] economy will grow by 0.3% in fiscal year 2023, and economic growth will average 1.8% from 2023–2033 (Figure 1). The CBO further projects the unemployment rate to increase by 1.7 percentage points, reaching 5.1% by the fourth quarter of 2023. The unemployment rate is then projected to decrease to its long-run rate of 4.5% by the third quarter of 2026.

The CBO sees inflationary pressures subsiding in 2023 and 2024 as the economy slows and the Federal Reserve's interest rate hikes take hold. The CBO projects consumer prices, as measured by the consumer price index (CPI), will increase by 3.5% (year-over-year) during the fourth quarter of 2023 and by 2.1% in the fourth quarter of 2024."

Secondly and most importantly, the Federal Open Market Committee (FOMC) rarely bases interest rate policies on day-to-day news. FOMC waited almost a year after costs started to rise in late 2020 with supply chain disruptions and huge consumer demand with unprecedented savings balances. The FOMC didn't begin raising rates until March 2022, after months of communicating their intentions to implement a rate hike policy. Also, the Federal Reserve has significantly improved its communication with the investment community since past chairman Ben Bernanke (2006 – 2014) determined to increase the transparency of the FOMC intentions, which has carried through to current Fed Chairman Jerome Powell. The investment community does not have to guess what the FOMC is considering, as Jerome Powell has been very clear about their intentions and policies.

So why would major media then spin good news as bad news? Why did the stock market open lower today, and is there any connection? First, the media only has one objective, and that is to gain viewers of their content. Being accurate or informative is secondary. If a sensational story proves inaccurate, they will print a correction notice later, typically in a short comment buried somewhere. Concern over the bad guys, aka the Federal Reserve, seems to gain readership, so they are staying with this storyline.

The stock market may have opened slightly down today for any number of unrelated reasons to today's retail sales that could including China's sinking economy, the Israel and Gaza conflict, the Ukraine war, declining car sales, the UAW strike, etc. At the start of every day, I read the one to two-sentence tagline released by the Associated Press (AP) and CNBC that defines the day's activity.

This tagline is then repeated by all major networks with little deviation. Whether it's true or not is irrelevant.

So, no, there is no connection between the stock market's mild opening and retail sales. However, the media serves an important role in keeping everyone confused. Good news, interpreted as good or bad news, separates investors into camps of buyers and sellers that provide the necessary balance in the stock market. Our view is the economy is showing continued signs of stability with rising consumer sales that represent 66% of US economic commerce, and ultimately, that should translate into rising stock prices.

WHAT DOES IT MEAN TO ME?

We have been writing about the importance of solid holiday sales to set the stage for 2024. Should retailers have good earning reports in January, that could add a tailwind to the stock market should investor confidence in the US economy remain positive. 2024 is a presidential election year that typically keeps politicians too busy lobbying to change tax laws or pass new legislation. Wall Street loves it when Washington is dysfunctional with a lower risk of new legislation that may reduce profits or government lawsuits against companies that grew too fast.

We maintain our favorable view of the US economy and stock market. We will keep you posted as new economic reports are released and whether they indicate a slowing or growing economy. For now, consumers are still in good financial shape and willing to spend. That is good news for the economy and stock market. Good news is still good news.