August was showing some solid gains before Monday's sell off thanks to the weak Retail Sales report, says Steve Reitmeister, editor of Reitmeister Total Return.
The overall decline of the S&P 500 (SPX) doesn't look too painful at -0.71%. However, the more closely tied the company is to the consumer...the more dramatic the losses. Like the -2.84% showing for the S&P Retail ETF (XRT).
Gladly not everything is doom and gloom as I will explain in this week's commentary.
The monthly Retail Sales report came out Tuesday morning a few notches worse than expected at -1.1%. Couple that with my note on Friday about how shockingly bad the Consumer Sentiment report was, and you have some extra questions marks floating around about the health of the consumer.
Yes, that notion hurt the overall market on Monday. In particular all the consumer-oriented names got pounded. Not even safe haven names like Home Depot and Target were spared the lashings.
Reity, should we be worried about what this means for the overall economy and stock market?
Right now, my assessment is no. This is not the beginning of anything ominous. And long-term bull market still very much intact.
However, this notion of potentially lower consumer spending does deserve our attention to see how it evolves from here just in case there are further signs of momentum to the downside.
First, let’s remember that the retail sales miss was in the month-over-month view of activity. However, in the year-over-year view sales were expected to be 11.5% higher and yet it came in much more robust at +15.8%. Hard to see that in a truly negative light.
Next we have to dial in on the specifics of the month to month drop. -1.1% is not great. But as it turns out the majority of the drop was consumers switching more from the purchase of goods back to services as the economy continues to reopen. This is not a bad thing in the long run as we need both goods and services at a strong level.
The point is that services in general cost less than goods. So that temporary shift in spending should not have a lasting effect.
Most important, as a guy with an economics background, I can tell you that the best predictor of future economic activity is the direction of the jobs market. In this case we are rapidly bringing people back to work. Plus, there are MANY more job openings than applicants in many cases. This creates a double-barreled gain for the economy in that more people are getting back to work...which leads to more income...which leads to more spending.
Gladly those who have jobs have fewer concerns about losing their job in the future, which increases the likelihood that they will spend extra money vs. save. In addition, if companies find it increasingly difficult to hire new employees, then those companies are likely to pay a higher amount to get employees to come onboard. This creates wage inflation, which also leads to more money in the hands of the consumer...and yes, more consumer spending.
Net-net, I do not believe that the recent data is truly the start of a downturn in the economy. This will likely prove to be a blip as the more telling jobs data points to more income/spending down the line. And yes, indeed, I would have no problem buying the dip in consumer oriented names (in fact, 6 of 14 positions in the Reitmeister Total Return portfolio fit that profile: BBY, BC, COLM, GPI, JETS, and SNBR).
The logic of this point seemed to be proved out in the second half of the Tuesday session as investors did buy the more extreme mid-day dip leading to a less-painful close for stocks. I sense there will not be much more downsides follow through from this news.
That does not mean that we are ready to embark on the next 5-10% bull run. I sense this market will continue to be volatile filled with periods of sector rotation and outlook uncertainty.
Yet with the economy continuing to heal from the coronavirus + low-rate environment it is hard to find a better place to invest than the stock market. This, more than anything else, should keep you tilted in a bullish posture and ready to enjoy the gains whenever the market is finally ready to move forward.
Portfolio Update
This past week was looking pretty good for our portfolio until today. 6 of 14 positions are clearly consumer oriented. That was working in our favor until Tuesday.
But what is done is done. We can’t call Doc Brown and take a time machine and change that outcome. The key is determining the best decision moving forward.
On that front, I still love all our six consumer stocks as much, if not more than I did before. So, I have NO INTENTION of selling them. And if any RTR customer doesn’t already have any of them in their portfolio, then now is the perfect time to grab your allocations on this dip.
That’s the big picture. Next let’s check in with the key insights on our individual positions:
Insperity (NSP): $100 breakout still in place and slowly but surely climbing up the RTR leader board to the #3 position. I definitely see some JCOM like qualities with this stock that it rarely is the big winner or loser on the day. But bit by bit does find a way to claw its way to impressive outperformance.
Columbia Sportswear (COLM): $100 breakout also still in place even with the consumer sell off Tuesday. However, I have to be honest that shares have not enjoyed as much of a catalyst from their stellar earnings beat as I would have imagined. No...I’m not in a rush to get rid of shares. There is nothing wrong...just not enough going right. Hopefully that “right turn” is right around the corner.
Kulicke & Soffa (KLIC): Looks like $70 was indeed a point of resistance and a good spot to trim some profits from these ripe shares. Looking forward there will be some new investors on board KLIC who bought between $60-70. They will not be satisfied til shares get closer to the targets of $80-88 laid out by some Wall Street analysts. However, when you have an earnings report as impressive as they put up, many will want to see what they have in store with Q3 earnings. If they can repeat the same impressive feat as Q2...then $100 is an intriguing possibility by year's end. Long story short, glad we took some profits off the table at $70. Now let’s keep the rest in hand to see how high this rocket ship can fly.
Brunswick is Making Waves (BC): I wrote up the commentary below when shares were pushing $108 late last week. Since then, we have seen a bit of a haircut...especially Tuesday with the consumer sell off. But all in all, I think the analysis is still correct. Here it is:
Still funny to me the drop this stock took below $100 in a widespread sell off for all stocks in related consumer discretionary categories several weeks back. Again, I am not a believer that price action is reality as some chart experts espouse. In fact, I think that price is the reality of what a lot of misguided investors and computers have agreed to for a very limited time. That’s UNTIL the true north reality of fundamentals take over driving more logical decisions and more appropriate pricing. Indeed, that true north part is coming true again for BC with shares powering higher. Probably find some resistance at $110 for a short while. Then should push on through as easily worth $130-140 on current earnings outlook.
Group 1 Auto (GPI): Shares were finding some nice traction including a +2.53% gain on Monday before Tuesday’s consumer stock debacle. Yet still a big fan of shares. And clearly, I am not the only one taking notice.
Virtus Investment Partners Winners (VRTS): Our only stock in positive territory Tuesday. Which is kind of funny because the basic outlook for VRTS is very much tied to the outlook for the bull market. Meaning the more stocks go up...the higher the assets under management (AUM)...the higher their AUM fees...the higher their profits and likely share price. So, if investors were truly worried about the consumer and what it means for the future health of the stock market...then they would sell VRTS with two fists. The fact that it rose is good foreshadowing that most investors just see Tuesday as a very temporary dip.Closing Comments
The first year after the Covid bear market was a rip-roaring success. Stocks just went up and up and up. Since then, the sledding has not been so easy. However, we find that if we stay focused on the logic behind the future health of the bull market that it keeps us firmly planted in the best stocks even when we have days like today. That patience to see past the short-term volatility keeps us firmly entrenched to enjoy profits when stocks get back on their logical upward trajectory.
Learn more about Steve Reitmeister at StockNews.com.
