Weekly Wisdom – May 24, 2023

By Hightower Great Lakes on May 24, 2023

Better Than Expected

While every earnings season has its own surprises, the underlying strength of the consumer has provided retailers with better-than-expected results. Around 74% of retailers in the S&P 500 index have reported earnings that highlight lean inventory positioning, better-than-expected margins and recurring traffic. While we want to highlight some of these trends, it is also important to see how far we have come.

Around 12 months ago, we were having a much different conversation about retail companies. We were witnessing the beginning of the shift from goods to services, which put the spotlight on bloated inventories, as companies like Target (TGT) and Walmart (WMT) reported earnings with inflated inventory balances of +43% y/y and +32% y/y, respectively.

This was clearly a problem – they all had too much stuff that consumers just did not want. Fast forward today, and we are looking at a different landscape, with Target (TGT) reporting inventory down -16.4% y/y and Walmart (WMT) reporting inventories down -7% y/y. Large retail companies were mostly able to report positive traffic, showing that the consumer is still shopping for what they need.

Strong Management Wins

While layoffs aren’t as prominent in consumer companies as in big tech, management teams are pulling other levers to cut costs to drive margin acceleration. Pricing has been an effective tool to provide this boost. Several prominent consumer staples companies have tremendous pricing power, which has been used to offset some of the impacts of inflation.

Lower freight costs have also been a positive catalyst to margins this quarter. The WCI composite freight container benchmark is down 75% y/y, which has helped companies in regard to cost.

The combination of better gross margins, lean inventories and positive consumer traffic has kept the retailers afloat this year. This can be seen in the performance of their stock price. The Consumer Discretionary ETF (XLY) is up 16.97% YTD, handily outperforming the S&P 500, which is up 9.2% YTD. When looking deeper into the consumer landscape, there is more divergence, as the Consumer Staples ETF (XLP) is barely positive on the year, up 0.30% YTD.

Chart 1: Divergence Between Consumer Staples and Consumer Discretionary¹

The chart above is not the only divergence we are spotting in the market – there has been extreme outperformance of the technology sector (XLK), up +25% YTD. A group of mega cap tech is up +39.4% YTD, showing tremendous strength versus other sectors, propping up the S&P 500. For comparison, energy (XLE) is down -9.3% YTD, while financials (XLF) are down -4.5% YTD – so, the outperformance is coming from a couple of sectors.

Chart 2: Divergence Between Mega Cap Tech vs. S&P 500¹

Positive Linings

It is easy to get bogged down by the negative headlines surrounding the market and the economy, but we want to encourage investors with some positive data points. The Fed continues to embark on slowing down the economy using rising interest rates, but right now, we are not slowing. The Atlanta Fed GDP now tool, which tracks GDP on a real time basis, is tracking Q2 at +2.9% growth. That is hardly pointing to a recession.

Another bright spot is that housing data has grown versus 2022. New home sales have recently shown the strongest results since March of 2022. To further this point, the NAHB (National Association of Home Builders) is at the highest level since July of 2022. Again, pointing to more strength in housing, which has been reflected in home building stocks, as they have performed well this year.

We would also like to highlight the continued strength in the jobs market – across many economic data series like non-farm payrolls, ADP and the initial claims. The 4-week moving average in initial claims is down 16,000.

Additionally, the JOLTS (Job Openings and Labor Turnover Survey) data came in at 1.67, meaning there are 1.67 jobs available for every 1 unemployed person. Combining this with average hourly earnings running at 4.5% y/y, it points to a resilient consumer. 

Retail Sales Slowing

While the consumer is still shopping for services and essential goods, we acknowledge there is some weakness in the April retail sales numbers last week, which displayed below consensus expectations at 0.4% growth versus March 2023.

Only five out of fifteen categories showed acceleration, including auto parts, building materials and garden, health and personal, miscellaneous and non-store retail. As for the other ten categories, they slowed down sequentially. There are puts and takes in this economy, so it is important to look at both sides while making investment decisions.

Cross currents would be the ideal phrase used to describe 2023. We have seen some strong earnings highlighted by better gross margins, inventory and consumer traffic. We have watched the housing market make a comeback versus 2022 and have seen consistently strong job data.

On the other hand, retail sales are beginning to slow, as only five out of fifteen categories remained positive in the April data. Overall, the consumer is still chugging along, and we remain data focused on our approach to finding investment ideas and thinking about the bigger picture.

Click here to read last week’s Weekly Wisdom (5/18).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

---

¹ Source: FactSet (chart). As of May 23, 2023.

² Source: FactSet (chart). As of May 23, 2023.