The Federal Reserve’s unprecedented stimulus program has inflated stocks. But retail sales may play a bigger role in determining whether the equity-market rally will continue. After all, 70 percent of the economy is powered by Americans spending money at malls, department stores, pharmacies and the like.
With the holiday-shopping season starting now, investors and analysts are beginning to ask if consumer spending will improve — and sustain economic growth.
In the stock market, there has been a strong bias to the upside, with the S&P 500 Index rising in 15 of the past 20 days. Much of that is because investors expect the central bank to keep interest rates low longer than had been expected.
As you can see from the chart below, the U.S. consumer has yet to show confidence. Sluggish economic growth, high unemployment and waning confidence coming out of the Great Recession are to blame.
So we know that consumer spending is slowing — but is that because he is saving more? No. As you can see from the orange line in the chart below, his disposable income is growing at only 2 percent in nominal terms. Adjust that for purchasing power (inflation), and that dwindles to about 1 percent.
That doesn’t bode well for holiday sales. In the chart below, you can see the relationship between discretionary income and retail sales, as well as the current deceleration.
So what does that mean for holiday shopping? We are likely to see another lackluster year in retail sales, which could hurt corporate earnings, investment, hiring and so on. Until consumers spend more, the Fed may retain its stimulus a little longer.
The Money and Markets Research Team