Stock valuations are the discounted values of future earnings. Future earnings depend on future revenue, which may diminish whenever the future includes a recession. So, broad economic conditions are a big factor to watch in stock valuation.
Broad economic conditions depend ultimately on the consumer’s ability and willingness to spend money. And July’s retail sales report gave us a peek at that.
Why Consumer Spending Is Still Low Compared to Previous Recoveries
Core retail sales rose 0.6% from June. The uptick was more than analysts expected, and most categories were up, too. The exceptions were clothing and electronics sales.
The latter may have to do with potential smartphone buyers waiting to see new iPhone models expected to debut this fall.
Peter Boockvar summed up the bigger picture:
Bottom line, after the slowest y/o/y core sales gain since March 2016 in June of 2.5%, they rose by 3.6% y/o/y in July, which is about in line with the 5-year average of 3.3%. This pace, though, still remains well below the 5%+ growth rates in the two prior recoveries. Here are some reasons why: Many consumers have jobs, but we know accelerating wage gains remain spotty; the savings rate is near the lowest level since 2008; and credit card debt, student loans, and car loans each total $1T+. Lastly, we know healthcare spending (high deductibles) and rent have dominated the budgets of many.
Consumer spending, at least according to this report, is up compared to the recent past but far lower than it should be at this point in the cycle. Peter mentions debt as one factor. The New York Federal Reserve Bank just updated its consumer debt chart, giving us an enlightening breakdown.
Why it’s on our radar: Another economist is predicting that the United States will plunge into a recession within the next 12-18 months. John Mauldin, of Mauldin Economics, says that “broad economic conditions” are a major factor to watch in terms of stock valuation and other macroeconomic measures within the economy, a complex but necessary process in order to understand what may be coming. To read the rest of our analysis on this and other important system disruption events, subscribe to our Weekly Executive Intelligence Summary — click here.