As a coincident indicator, retail sales data reflects a lot more than you think...
Consumer spending accounts for almost 70% of our Gross Domestic Product (GDP), so it is a key element and gauge of the U.S. economy. And “Retail Sales” comprise roughly half of the total consumer spending, which translates into about one-third of our aggregate economic activity.
As such, it’s a very important measure of our economy and helps influence the direction of the stock and bond markets.
Retail Sales Report
Anyone can monitor retail sales in the aggregate by following the Commerce Department’s Retail Sales Report, released monthly. The Report is released mid-month, with data for the previous month’s sales, and it tracks merchandise sold by both traditional, brick-and-mortar stores and by non-store retailers (like mail catalogs and even vending machines). Data for Internet retail sales (e-commerce) are also included.
And despite what you might think, surprisingly e-commerce only accounts for about 15% of total retail sales. Will this number increase over the next few years? For sure. But are traditional stores dead? Not by a long shot.
Further, quarterly summaries in the Report can reveal some very important trends. In fact, the Report’s two main components are:
- Total sales, also with a percentage change from the previous month, and
- Total sales excluding autos and gasoline, with the percentage change.
The second component excludes motor vehicle sales because they are very high-ticket items that fluctuate more than overall retail sales and excludes gasoline due to the volatile swings in oil and gas prices.
Uses of the Retail Sales Report
Not only does the Retail Sales Report reflect the status of specific retail sectors (with clues to how their overall stock prices might change), but it also acts as a coincident indicator.
As a coincident indicator, the Retail Sales Report gives investors, economists, and policymakers information about the current state of the economy. If consumers are spending their money, then GDP will probably show economic growth. On the other hand, if consumer spending decreases, then GDP will probably show a slowing economy.
The Retail Sales Report also provides a glimpse of developments in unemployment. If the economy slows down or shrinks, unemployment rises and workforce participation rates decline.
If the economy shrinks, investors can also foresee a possible slowdown in the stock market or even a pending recession.
Further, the Report is a good pre-inflationary indicator. When GDP grows, inflation tends to increase. Because investors see it as a predictor of inflation, they begin to plan for possible Fed Reserve interest rate moves. The Federal Reserve uses interest rate adjustments to manage inflation, among other things. In simple terms, increasing the rate reduces the amount of money in the economy, thus reducing inflation.
Corporate Profits and Component Sectors
Retail sales give investors not only a sense of the economy as a whole, but also the trends among different types of retailers. If auto sales are weakening or apparel sales are especially strong, for example, investors can spot specific investment opportunities, whether in a sector or a specific store or brand. Further, strong retail sales can lead investors to purchase stocks of major retailers, like Walmart, Sears, or Home Depot.
But investors need to be careful and not invest without really understanding the risks – especially if they invest in a particular stock. The vast majority of the time, investors just don’t have the time to perform the proper research and stay up to date on how particular companies or sectors are performing; so that’s usually best left to a professional.
Effects on Stocks and Bonds
The Retail Sales Report affects both the stock and bond markets too. Strong retail sales are favorable for the stock market, as investors purchase more retail stocks or simply invest more because of the probable rise in the GDP. Sluggish retail sales can have the opposite effect.
For the bond market, on the other hand, strong retail sales can lead to a decline. Strong retail sales suggest the possibility of inflation, which makes bonds worth less, so investors sell them and head to stocks. However, if the Federal Reserve seems more likely to increase rates to combat inflation, then generally speaking, the bond market rises and stocks fall.
What Should Investors Do?
Sound confusing? Well it can be because there are so many factors affecting the financial markets.
Be sure to consult your team of financial professionals for specific guidance.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
This article was prepared by FMeX.
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