Investors See This Economic Glass as Half Full, But I'm Skeptical
Remaining cynical of this market might not be popular, but close data analysis makes it hard to do otherwise.
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Much better-than-expected July retail sales and lower-than-expected weekly jobless claims data helped power a large rally on Thursday. Walmart WMT also chimed in by noting that they don't see a recession on the horizon after posting stronger than expected second quarter numbers.
This allowed the NASDAQ to rise over 2.3% on the day. The Dow gained just over 550 points while the S&P 500 rallied 1.6% on the day. Even the Russell 2000 which, outside of July, has been a market laggard throughout 2024, was up nearly 2.5% on Thursday.
Investors continue to be more than willing to look at every glass as more than half full. The VIX has had its fastest seven-day decline in its history as a testament to that optimism as worries about Japan, the carry trade and the deteriorating jobs market have been memory-holed at the speed of light. And I hate to be a killjoy, curmudgeon or permanent skeptic. However, there are some caveats that need to be noted about some of the key factors that drove the market yesterday.
The 1% month-over-month increase in retail sales in July was the biggest rise since the beginning of 2023. However, some two-thirds of the increase in retail sales was due to auto sales. Dealers are cutting prices as inventories started July with just over 2.9 million vehicles on lots, an over 50% year-over-year increase. In addition, June retail sales numbers were revised lower. This now makes eight months in a row that the previous month's sales number was taken lower in the subsequent update.
In addition, Walmart seems to be the beneficiary of trading down by some consumers and one also has to acknowledge it is one of best run retail concerns in the country and has been for decades now. Other concerns like Home Depot HD, Victoria's Secret & Co. VSCO and a gluttony of other retailers are experiencing year-over-year same store sales declines. Most of the fast-food industry is resorting to bringing back value meal options to address tepid consumer demand.
As far as the jobs market, the unemployment rate has ticked up to 4.3% from 3.5% last summer, triggering the so called "Sahm rule," which could be used to see before every recession was triggered since the 1950s. Job openings remain near three-year lows and despite encouraging weekly jobless claims, well-known names like Cisco Systems CSCO, Intel INTC and Stellantis N.V. STLA have announced significant new layoffs here in August.
Therefore, I continue to remain much more wary around equities than most investors. Especially so, given the S&P 500 is trading with a dividend yield of just over 1.3%, right at the bottom of its historical valuations. The index is also trading with a price-to-sales ratio of approximately 2.9. The only time this century that the S&P 500 was trading at a higher level (3.04) was in December of 2021. This was just before the S&P fell some 20% in 2022 with the NASDAQ losing nearly a third of its value.
So, while being a cynic on the market and the economy is currently a lonely space to occupy, based on valuations and data analysis, it seems a prudent one.
At the time of publication, Jensen had no positions in any securities mentioned.
