Weekly Market Update: August 29, 2022
The U.S. consumer has proven resilient amid the high inflation environment. Although the headline July retail sales figure was flat on a month-to-month basis, the core reading, which excludes the automobile component, climbed 0.4%. The consumer sector accounts for roughly two-thirds of the gross domestic product (GDP) and the positive demand figure, when coupled with solid job-creation numbers, may indicate the U.S. economy is somewhat stronger than other recent data have suggested.
Quarterly results from the retailers were better than anticipated. Mass merchandisers Walmart and Target beat lowered expectations, and the club store operators Costco and BJ’s delivered strong results. However, they did say that consumer behavior has changed in recent months, with many trading down to less expensive private-label items as inflation remains high.
The Federal Reserve is walking a tightrope in its battle to tame inflation. July consumer and producer prices did show some moderation, but most of the relief was due to lower energy costs. The central bank is likely to remain on its current monetary tightening course, but has to guard against being too restrictive and pushing the economy into a deep recession. There has been notable demand destruction in the housing market, and the U.S. consumer is taking on more debt at higher rates to deal with inflation. The Federal Reserve Bank of New York said that credit card balances rose 13% in the second quarter, the largest year-over-year increase in more than 20 years.
Meantime, the economic news from overseas is worrisome. Of note, the consensus forecast for China’s GDP growth has been lowered recently, and inflation in the euro zone continues to rise, with a possible energy crisis looming this winter. Fixed-income yields in Europe recently jumped and, along with Federal Reserve leaders reiterating plans to raise interest rates through yearend, took some steam out of the recent equity market rally.
Conclusion: Given the concerns about slowing global economic growth, we think it is prudent to look at the stocks of the well-capitalized companies that have the financial wherewithal to weather an economic downturn, while maintaining their dividends.