Market Insights: Retail Sales Rebound

Macroeconomic and Market Developments:

• Stock markets in North America were mixed this week. The S&P500 and the Dow were up very slightly, rising 0.20% and 0.07% respectively. The TSX Composite index moved in the opposite direction, finishing down 0.75% on the week.
• Oil prices were fairly flat this week, with West Texas crude up less than a dollar to finish just under $41. Similarly, Western Canadian Select was unchanged at roughly $30 this Friday.
• The Canadian dollar slipped somewhat this week, falling 76.3 cents to 75.8 cents this Friday.
• Gold fell this week to $1,903 from $1,935 last week.
• Air Canada announced this week that it has completed its takeover of Transat, however at a drastically reduced price of $5.00/share. The originally agreed upon price was $19.00 before COVID-19 affected the airline and travel industry.
• In related news, WestJet announced on Wednesday that it is suspending service to a number of eastern Canadian cities due to the effect of COVID-19 on air travel demand to the region. WestJet reported that passenger load factors to the Atlantic region are down 90 per cent year-over-year.
• On Tuesday, the Alberta UCP government announced a massive shakeup of Alberta Health Services. The government plans to reduce staff numbers by 11,000 saving an estimated $600M per year. Most of those jobs will be as a result of outsourcing operations.
• Johnson & Johnson announced on Monday that it is pausing stage 3 trials on its COVID-19 vaccine after adverse side effects were noted in one participant.
• The European COVID situation worsened this week as many cities are now reinstating lockdown measures. Perhaps the most stark of these measures was French president Emmanuel Macron instituting a curfew of 9 p.m. to 6 a.m. in the Paris region and eight other metropolitan areas, beginning on Saturday.
• The total global COVID-19 cases stands now at roughly 39.5 million this week, with the total death toll at 1.107 million. Total cases in Canada are at 191,732, with active cases at 20,543. Alberta currently has 2,738 active cases.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker: COVID TRACKER

Charts of the Week:

The U.S. monthly retail sales report for September came out today and has modestly helped the market push a bit higher at the end of this week after early week weakness. The Monthly Retail Trade Survey from the U.S. Bureau of the Census is an important and widely watched economic growth report because it covers the durables and non-durables portion of consumer spending, and consumer spending typically accounts for about two-thirds of GDP. The headline retail sales showed month over month growth of more than double economists’ forecasts (1.9% vs. 0.8%). Even ex-autos and gas, the reading came in at 1.5% vs. 0.7% expected. In addition, breadth in this month’s report was strong. As you can see in the table below, of the 13 sectors that comprise the total pie, all but one of them showed growth. Normally any growth in a sector of 1 or 2% month over months is considered strong, but this month we saw three sectors with growth rates in the 3-10% range which is very impressive. Looks like people are really stocking up on winter clothing!

More importantly, looking at the longer-term trend, the Bespoke Investment Group publishes their Diffusion Index of the average net number of retail sectors showing m/m growth in sales. This has been in a rapid and steady uptrend and has continued to spike higher this month. The index is now at its best levels since July of 2019, posting five straight months of positive breadth. If the October report comes in strong as well, we could possibly see this diffusion index take out the record high posted way back in August of 2003. To put everything we have seen in perspective, from February (before COVID shutdowns) to the bottom in April, retails sales fell 21.7%. With the increase in September, we are now 4.2% higher than the February mark (and 5.4% higher since last September), meaning retails sales have had a full V-shaped recovery and now tracing out a checkmark to new highs. Impressive indeed.

Source: Bespoke Investment Group

In addition to seeing new highs in the S&P 500 Cumulative Advance-Decline Line as we described last week, we also saw another breadth thrust occur where over 90% of the stocks were above their 10-day moving average (after falling to at least 10% first). There have been 34 prior occurrences of this over the last 40 years. As you can see in the chart, many of these, some in clusters, have occurred at lows. We last saw this signal in late March which proved to be a very important low. Before that, it occurred in late 2018/early 2019 and in early 2016, again, both important lows. In tallying up all the combined numbers, the forward-looking numbers are very strong when this signal is triggered. In the top left of the chart you will see a table that shows the mean and median forward-looking returns over the next three quarters which have been well above average than all other periods.

Source: @edclissold, Chief US Strategist, Ned Davis Research Inc.

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Government of Alberta, worldometers.info, oilprice.com, Canaccord Genuity, Bespoke Investment Group, Ned Davis Research Inc.