Several big box retailers, who provide a pulse on the American retail consumer and broader industry trends, reported weak earnings last week. Investors reacted to commonly-cited pressures including rising costs. However, our view is that the troubles in retail are more nuanced. This week magnified an emerging theme that we have been expecting where consumers are shifting from a focus on the need for goods to spending on services.
Spending on services has been running below its pre-pandemic pace while retail sales have reached an all-time high. During this period, consumers have been more focused on areas such as household goods and less on entertainment, travel, and other in-person services such as elective healthcare. As COVID-19 fears wane and spending patterns return to normal, it is anticipated that the pendulum will swing back towards services. As an early sign, we have seen major airlines, hotels, and travel websites report demand that is approaching pre-pandemic levels as well as outsized earnings surprises in Q1 of this year.
Likely as a result of this change in spending patterns, retailers saw their inventories build in Q1 and have had to introduce some discounts at their stores. In addition, the costs have risen due to higher transportation and raw materials costs. This will have a negative impact on profit margins, though this impact will be different depending upon the industry and sector of the economy.
A look back
- Global equities fell on the week, due to U.S equities declining 3.0%, while both international developed and emerging markets stocks rose. U.S. stocks avoided bear market territory and have declined 17.7% year to date. The S&P 500’s seven-week decline is its longest losing streak since 2001.
- 10-year U.S. Treasury yields fell 14 basis points last week to 2.79% as investors sought out safety in bonds amid fears of a slowing economy.
- Retail sales rose 0.9% month over month in April to a new all-time high.
A look ahead
- The minutes from the May Federal Reserve (Fed) meeting will be released, providing insight on the decision to increase policy rates by 0.5% and what the future path of policy could look like.
- Multiple Fed officials will hit the speaking circuit this week including Chair Powell and Vice Chair Brainard.
- Economic releases: Durable Goods Orders, Revised Q1 GDP, Personal Consumption Expenditures, S&P Global U.S. Manufacturing & Services, University of Michigan Sentiment.