Weekly Wisdom – November 17, 2023

By Hightower Great Lakes on November 17, 2023

The U.S. consumer accounts for over 70% of U.S. GDP, so a week filled with retail sales, big box store earnings, and consumer price index (CPI) and producer price index (PPI) readings provided insight into where the consumer stands.

October retail sales came in better than consensus. The +2.5% y/y print comes on top of a +7.4% print in October 2022, raising the two-year October stack to +9.9% growth for consumer sales.

Health and personal care, auto parts, food services and non-store retail led the pack this month for retail sales, growing over +7% y/y. Considering the performance this year in e-commerce companies, such as Amazon (AMZN), the strength in non-store retail does not come as a surprise.

Chart 1: Retail Sales[1]

The laggards remain furniture and home, building and garden materials, department stores, and gas stations. The furniture and home sector has been consistently weak this year.

Big box retailer TJX Companies (TJX) mentioned the opposite today on its earnings call, as it has had two consecutive quarters of growth in its home segment. In fact, the 9% same store sales number from TJX was the best in the last 6 quarters, which saw same store sales down 8% on average. 

Consumer and Producer Price Index Results

The CPI broadly slowed this month, falling to a new low at 3.2% y/y versus the peak last June at 9.1%. This move was largely cheered on by markets because it is a strong indication that the Federal Reserve is likely done hiking interest rates. A sustained decline in the price of goods has provided some relief to consumers in recent months, as core goods prices fell for a fifth straight month.

The PPI also slowed, bringing the report to +1.3% y/y,  down from the +2.2% y/y number in September. The core gauge posted the smallest annual increase since the start of 2021.[2] This is encouraging to say the least. Normalizing supply chains and a broader shift in consumer spending towards services have also helped this trend.

The bottom line is inflation has peaked (CPI, PPI, PCE, unit labor costs and productivity all support this) which means interest rates have also peaked – which is good for risk assets. 

Chart 2: S&P 500 Consumer Discretionary Performance[3]

Chart 1 shows the impact that both Tesla (TSLA) and Amazon (AMZN) have had on the consumer discretionary sector this year. The consumer discretionary index (XLY) is up over 30% year-to-date, and as you can see above, it has been largely powered by two names.[4]

It helps that Tesla (TSLA) has a 18.03% weighting in the index while being up 97% year-to-date; and Amazon (AMZN) has a 24.11% weighting in the index and is up over 70% year-to-date.[5] The third biggest weighting in the index is McDonald’s (MCD) with only a 4.35% weighting – which shows the impact that these mega-cap companies have on an index such as consumer discretionary. 

Retail Earnings Recap

Home Depot (HD) reported Q3 earnings this week, and same store sales came in better than expected which was also the case for earnings per share. Transactions were down (-2.4%) and average ticket was down (-0.3%), but the key highlights were gross margins on lower freight costs and mix. 

Target (TGT) surprised the market this week with an earnings report that beat consensus estimates on sales, earnings per share, revenue and operating margins. The operating margin growth or profitability was exceptionally strong and was a positive surprise. Sales are still under pressure, but things that the company can control, like expenses, show the beginning of a turnaround for the company.

Similarly, TJX also had a solid earnings report this week with an impressive beat on comparable sales, which was led by traffic growth in all segments and regions around the globe. TJX has been benefiting from the de-stocking trend all year, as it is able to buy excess inventory from the big box retailers that are shedding it.

We have been encouraged by these reports so far this week and believe this bodes well for consumer resiliency, which impacts 70% of U.S. GDP.

Click here to read last week’s Weekly Wisdom (11/9).

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.

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[1] Source: Morgan Stanley Research. As of November 15^th, 2023.

[2] Source: Bloomberg Research. As of November 15^th, 2023.

[3] Source: Bank of America Research. As of November 15^th, 2023.

[4] Source: FactSet Research. As of November 15^th, 2023.

[5] Source: SectorSPDR.com. As of November 15^th, 2023.