Retail Sales Missing Estimates Potential Catalyst for Market Correction?

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by Keven Young

U.S. retail sales fell short of estimates in October rising only 0.3%, the lowest pace in the last six months. The median estimates by Bloomberg’s survey of economists was a 0.5% increase.   The miss could be the catalyst for a 5% to 10% market correction.

This number would suggest that consumers are becoming more hesitant when faced with rising global COVID cases and the possibility of a second wave of lock-downs. The chart below shows retail sales percent changes monthly since October of 2018.

Consumer spending accounts for roughly two-thirds of the economy and paired with the record jump in GDP that came in the third quarter, the worse than expected consumer spending data released in retail sales could signal a sharp slowdown in economic growth.

Former Federal Reserve Bank of New York President, William Dudley on Bloomberg Television said “The fact that the retail sales were a little weaker in October reinforces the idea that if the pandemic gets worse and there are more shutdowns and restrictions, that the November data, which we haven’t gotten yet, will be even softer”.  While a handful of states including New Jersey and California have started implementing new restrictions, and many other states have paused their plans to fully reopen, it would be expected that retail sales will slow economic growth moving forward.

This weak growth in retail sales would likely have fallen negative, if it were not for two of the largest retailers reporting very strong quarterly results – Home Depot Inc, and Walmart, Inc.  Home Depot has clearly benefited from the pandemic due to the surge in renovation activity and Walmart’s sales climbed higher than expected due to growth in their online sales.

Consumer confidence and consumer spending historically have a good correlation. Both have been increasing steadily over the last 10-years but in February of this year, the University of Michigan’s consumer sentiment survey had declined significantly and does not show signs of recovering in the short term.

Retail sales coming in below the estimates of economists further confirms the argument made in “Premature Vaccine Rally to soon Fizzle!” that the decline in consumer confidence in November predicted a decline for consumer spending.

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