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Retail Sales: Don’t Bet Against the American Consumers
Stock Analysis & Ideas

Retail Sales: Don’t Bet Against the American Consumers

American consumers went on a spending spree in September despite rising inflation, the Census Bureau reported on Friday.

Retail sales for the month rose 0.7%, following an upwardly revised 0.9% gain in August, and beating market forecasts of a 0.2% fall. Excluding autos, retail sales fared even better, rising by 0.8%. (See Insiders’ Hot Stocks on TipRanks)

Sporting goods, hobby, musical, and book stores registered the most significant sales gains (3.7%), followed by general merchandise (2%), gasoline stations (1.8%), and clothing (1.1%). Some sectors registered losses, like health and personal care (-1.4%), and electronics (-0.9%).

The unexpected gain in September sales comes at a time of supply chain bottlenecks and labor shortages, which have pushed prices higher. For instance, three inflation measures released by government agencies this week showed that inflation remains elevated.

Presumably, higher prices should discourage consumers from opening their wallets. That didn’t happen, as there’s plenty of pent up-demand due to the pandemic lockdowns, and there’s plenty of savings accumulated during the pandemic recession.

Meanwhile, there’s plenty of money to pay for it, as incomes rose during the pandemic thanks to generous government benefits.

Effect on Wall Street

The unexpected rise in September retail sales is a mixed bag for Wall Street. On the one side, it shakes off fears of stagflation, the simultaneous increase in inflation, and sluggish economic growth.

That’s a good thing for equities, as it helps boost the profitability of the listed companies. Thus, the jump in the major equity averages at the opening. 

Solid retail sales aren’t a good thing for the debt market though, as they raise the prospect that the Federal Reserve will speed up tapering, the rolling back of its bond purchasing buying program.

The Fed has already announced that tapering will begin in mid-November or mid-December, and end by the middle of the following year. It could also proceed with interest rate tightening. Thus, the spike in the 10-year Treasury bond yields on Friday’s early morning trade.

Rising bond yields, in turn, could be a headwind for equities. They reduce the value of future earnings, and therefore, make equities less appealing. 

While it’s unclear whether these headwinds will derail the strong rally on equities that began on Thursday, one thing is clear: Wall Street will cast a wary eye on inflation to determine whether the old villain is just an aberration, or the new normal.

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