Wealth Management & Financial Planning

Wealth Management & Financial Planning

The Double-Edged Sword of Strong Consumer Sentiment for Retail Companies

There is an economic conundrum in more places than meets the eye of the average investor. Great economies don’t always mean great stock markets. Great consumer confidence doesn’t always make for great retail store earnings. Those two observations might surprise some but they are critically important to keep in mind.

There was nothing different in the economy March 9th of 2000 than there was March 10th of that year. The market was entirely different as the infamous “Tech Wreck” started the morning of the 10th watching the high flying NASDAQ tech stocks begin to drop. Companies that advertised in the Super Bowl a month earlier were nearly non-existent by the end of the month.

Simply put, markets and economies are two separate mechanisms. It is often said that markets are a forecasting machine of future earnings. That is true to an extent but a better thought is they are a forecasting machine of increasing earnings. The stock market doesn’t look at the size of the economy near as much as the trajectory of the trend in growth of the economy. If growth appears strong economically – as they appear to be today – the market participants want confidence not that we can continue but rather improve. That is why you hear so many conflicting points of view on markets today.

A great example of this situation can be easily seen in the retail companies today. Consumer sentiment is at an 18 year high meaning that people are feeling great about the future and their current state. They are ready and willing to spend or so the sentiment indicator would infer. The more secure and happy people feel the more likely they are to quit their job for other opportunities or leave the workforce all together.

The retail stores need workers and need deliveries and the economy is so strong finding these workers for the holiday season is expected to be a tough predicament this year. Target, for instance, just took their starting wage from $11 per hour to $12 because they can’t find enough workers. They raise the wage to attract employees from other lower paid positions. This is called wage inflation where wages go up even though productivity didn’t necessarily increase.

Another retail operation is providing paid vacation for part-time employees and others are hosting job fairs in mass events. The retail sector has presumably plenty of people ready to buy their goods but they have a challenge finding the workers to sell and deliver the goods.

The investor now has a quandary in terms of selecting the right stocks in this environment. Do you invest in companies that have lower priced goods and lower priced help or do you buy companies whose operating margins may be squeezed by increased wage pressure?

The intent of this article is not to encourage buying or selling retail stocks. The purpose is to remind you the vast difference between the apparent health of the company today and the future stock price. The professional investor will try to figure out the trajectory of the earnings in the future.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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