Market Commentary - 11.14.14

Hey Consumer, You're Looking Good!

It is common knowledge that consumer spending represents at least two-thirds of the U.S. economy. As such, readings on the state of the consumer are important to gauge the direction of economic growth. Today, we received three readings on the outlook of the consumer going into the all-important holiday season. We believe these reports portray an optimistic tone about the consumer and the upcoming holiday season that offer a possible tailwind to U.S. economic growth.

The National Retail Federation (NRF) is the world's largest retail trade association. Its members include department store, specialty, discount, catalog, Internet, and independent retailers, chain restaurants, and grocery stores. For the 2014 holiday season, the NRF expects holiday sales to increase 4.1%, a pretty solid gain over last holiday season's 3.1% increase. Because sales in November and December can account for as much as 30% of a retailer's annual sales, a strong holiday season is very important. Helping to set the stage for a solid holiday season were reports that came out today.

  • U.S. Retail Sales Report. According to this report, U.S. retail sales increased 0.3% in October beating consensus estimates of 0.2%. The reading suggests that fourth quarter consumption growth could be around 2.5% annualized. The rise in October retail sales was even stronger than it looks because the headline figure was depressed by a price-related drop in gasoline station sales. Auto sales were modestly higher as were building materials. Retailers are hoping the solid October retail sales figures will bode well for the holiday shopping season.
  • Consumer Sentiment. The preliminary November reading on the University of Michigan/Thomson Reuters consumer-sentiment index climbed to 89.4. This was a jump from October's final reading of 86.9 and the highest level since before the Great Recession. The sentiment change was not too surprising as job growth remains strong, the stock market continues to hit record highs, and gasoline prices have fallen substantially. This reading suggests that the recent strengthening in retail sales growth is here to stay.
  • Business Inventories. The Department of Commerce announced that business inventories rose 0.3% in September and are up 5.3% from the previous year. This could be a sign that retailers are optimistic about the holiday season and are building up their inventories in anticipation.

Taken together, these readings suggest that the consumer has been improving and help to justify the healthy holiday sales gains that the NRF is predicting for 2014. We are also optimistic in these reports and believe that if correct, the holiday season will be strong. From these reports and a possibly stronger holiday season, U.S. economic growth should continue to improve. With this in mind, we remain committed to our overweight in domestic equities. On the other hand, as the Fed starts to implement higher interest rates, we can expect a subsequent rise in credit card, mortgage, and auto loan rates to affect consumer spending. This, along with the fact that gasoline prices will not likely stay this low forever (i.e. OPEC intervention), could eventually represent headwinds to the consumer. Despite the overweight to U.S. equities, we remain committed to our bias of increased portfolio diversification to help brace against any resultant market volatility.

This information is compiled by Cetera Investment Management.

About Cetera Investment Management
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