Retail Stocks’ Rebound Is Reason to Cheer
This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
The Week in 60 Seconds
Retail gained 4.4% this week after losing 2.4% in the prior week. Last week’s disappointing Target earnings now appear to reflect certain company-specific factors, as this week we saw significant postearnings reversals in shares of
Dick’s Sporting Goods
In our view, one takeaway is that consumers are no longer “price-unconscious,” and (as we discussed at the end of 2021) elasticity models will begin to work again. The consumer appears to have a “barbell” approach to spending: low-end necessities and higher-end experiences/luxury items are doing fine, while general merchandise spending is being delayed (i.e., getting one more year out of that worn-down patio furniture is okay).
Another possibility is that
started an arms race for workers, warehouses, and inventory that didn’t stop until it was too late. Other large retailers couldn’t risk being left behind, and ultimately misjudged demand. Margins suffered and stock prices were down double-digits. This week, various retailers started to balance the macro narrative, with the demise of the consumer now appearing to have been greatly exaggerated.
Christopher P. Harvey, Gary S. Liebowitz, Anna Han
A Good Time to Buy Bonds
The Aden Forecast: Money, Metals, Markets
May 26: Long-term interest rates have been declining for the past two weeks. The 10-year yield hit a six-week low [Wednesday] and the 30-year yield is breaking below 3%. Plus, the leading indicators are telling us that long-term interest rates are set to fall further (bond prices are poised to head higher). If so, this could mark the beginning of the bond price rise we’ve been anticipating. And if it is, this will be a recessionary sign because bonds do well in that environment. So continue to keep your long-term U.S. government bonds and/or bond funds. If you haven’t bought bonds and/or you want to add to your positions, this is a good time to do so.
Pam Aden, Mary Anne Aden
Gasoline Consumption Trends
Chart in Focus
McClellan Financial Publications
May 26: When we were all locked down for Covid in April 2020, total gasoline consumption in the U.S. fell to a low rate that month of 228 million gallons per day. That is the lowest single-month reading in the EIA’s [Energy Information Administration] data set, which dates back to 1983.
Consumption has rebounded since then, of course. Not surprisingly, there is an inverse relationship between oil prices and gasoline consumption, although oil price changes over time don’t explain all of the variation in gasoline use. And the recent rise in crude oil prices has still not yet stopped the rebound in gasoline usage, as Americans get back out to work and shop again. This is, in part, due to the point that crude oil isn’t the only cost factor in what we pay at the pump.
The March 2022 single-month reading for total U.S. gasoline consumption of 344 million gallons per day was just a hair above the 343 million gallons a day in March 2021, a year earlier. So we may soon be seeing U.S. consumption start to roll over, as the high oil prices start to bite and Americans get convinced to conserve even more.
The Case for U.S. Equities
May 24: In the near term, the markets will favor visibility of growth and relative changes to growth rather than the maximization of growth. So, what we can see and have some confidence in is likely to be rewarded in this environment. We also like companies that can manage input costs and have pricing power, with inflation unprecedented in recent decades.
Over the long term, we like companies that fit into the notion of a shifting opportunity set—industries that haven’t experienced much growth recently but could benefit from the environment we’re in. Examples include banks and natural-resource companies in different parts of the world.
As we look around the world and assess the valuation embedded in expectations, the United States is the most expensive market, but the growth outlook there is higher and more visible than in the rest of the world. Thus, U.S. equities are compelling.
Bears and Recessions
May 23: In the past several weeks, questions have been asked about the linkage between increasing inflation, the rising risk of recession, and the need to brace for a bear market. History implies, but does not guarantee, that whenever the year-over-year (Y/Y) rise in headline CPI exceeded one standard deviation above the mean—as is the case today—the U.S. economy slipped into recession. What’s more, bear markets triggered by impending recessions (bears anticipated recessions by an average of seven months) ended up being deeper and longer than those not associated with recessions.
There have been 12 bear markets since 1948, and an equal number of recessions. While most bear markets were typically triggered by impending recessions, not all bear markets were paired with recessions. Indeed, three bears (1961, 1966, and 1987) occurred independently of recessions, while three U.S. recessions were not preceded by bear markets (1953, 1960, and 1980). When the stock market anticipated a recession by slipping into a bear market, the peak in prices occurred an average of seven months prior to the recession’s start. Only once did a recession start simultaneously with a top in prices (1990). Encouragingly, while recessions lasted an average of 10 months, bear markets bottomed an average of four months prior to the end of recession.
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