QQQ - The Window For A Significant Stock Market Decline Is Closing

2024-01-18 09:30:44 ET

Summary

• Retail sales in December exceeded expectations, indicating a strong holiday season and no indication of a recession.
• Credit card debt rose by only one-third of the increase in sales, suggesting consumers still have excess savings to fund purchases.
• The report bodes well for fourth quarter GDP growth, but there were signs of softening that may lead to a gradual deceleration in growth.
• The soft landing is on track and the pullback in stocks sets the stage for a run at new all-time highs.

The details behind the incoming data don't seem to matter, as all of it is being interpreted negatively to feed this ongoing pullback in stock and bond prices. Yesterday's excuse was retail sales for December, which investors viewed as too strong to allow the Fed to begin reducing interest rates in March.

Before I tear apart that argument, let me review the numbers and their implications moving forward. Overall sales rose 0.6% in December, which was ahead of expectations for a 0.4% increase. Most categories saw increases, led by department stores and on-line shopping, which is no surprise given the holiday season. Auto sales were up 1.1% for their largest increase since May. There is no indication of recession in these numbers.

It appears consumers still have excess savings to fund their purchases, as credit card debt rose by only one-third of the $60 billion increase in sales from November to December. This undercuts the argument that debt is now fueling the economy and bodes very well for early 2024. This report strengthens the soft landing narrative and sets the stage for a solid start to the first quarter, but there were some signs of softening that portend a gradual deceleration in the rate of growth.

Most market pundits interpreted yesterday's retail sales report as too strong to allow the Fed to begin its rate-hike cycle in March. This is the same lot that told us last year the consumer would be crushed under the weight of inflation, debt, and depleted savings. The flaw in the current assumption is that a better-than-expected retail sales report does not necessarily translate into a higher inflation rate. It is the incoming inflation data, along with other leading indicators, that will determine changes in interest-rate policy. Last month's spending figures should not figure into the calculation. Investors should be more interested in what next month's spending numbers will be rather than looking over their shoulder.

The significance of the December report is that it bodes well for fourth quarter GDP, as core sales, which exclude autos, gas, food services, and building materials, rose 0.8%. This is the number used to calculate GDP growth. My favorite number is the year-over-year increase in retail sales on an inflation-adjusted basis, which also rose by a healthy 2.2%. This is a good sign given that retail sales are predominantly goods, but this had a lot to do with the holiday shopping season, which is over.

The only services category in the retail sales report is bars and restaurants, which is where we saw no growth in December over November. This is something to watch because services are what have been driving overall spending growth. This makes the upcoming personal spending reports, which are predominately services, very important. Perhaps consumers are starting to change their preferences for spending in an inevitable rebalancing after the post-pandemic period. If that is all this is, then there is nothing to be concerned about, but if the propensity to stop spending in the most discretionary category of them all is a trend, it is a modest concern. The year-over-year gain was still a very strong 11.1%.

Investors used this report to fret about a delay in interest rate cuts, and Fed officials are bound to use the headline number as an excuse to espouse hawkish rhetoric, but that is to keep expectations in check. The CME Fed fund futures market still sees the first rate cut at the March meeting, but the probability has fallen closer to 50% after yesterday's report. In reaction, the 2-year Treasury yield (US2Y) rose and stocks fell in the ongoing pullback to consolidate the fourth quarter gains.

I think we are getting a lot closer to the end of this pullback, especially for small-cap stocks, than the beginning of something more onerous. We are rapidly working off the excessive levels of greed that characterized the year end to a more neutral stance. Bears have been rejuvenated and the louder they growl the closer we are to the bottom. They are bound to make the same mistakes they did last year in October and March, refusing to give up on the broken narrative that the bear market of 2022 never ended. The window for a significant stock market decline is bound to shut on them just as it did the two times before.

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