People are refusing to put their lives on hold 🛫
And that’s bullish 🎉
“People want to do things,” Neil Dutta, head of economics at Renaissance Macro Research, recently said in a post on LinkedIn.
Dutta pointed to data from travel site Kayak, which showed searches for domestic and international flights continued to trend higher in March from their Omicron wave lows of December.
“Why? I think the answer is obvious,” Dutta said, pointing to data from polling firm Civiqs. “The trajectory of COVID offsets energy prices for the time being. Indeed, concerns around coronavirus have collapsed lately.“
On Wednesday, we learned retail sales in the U.S. grew by 0.3% in February. The details of the report showed that spending was shifting from goods to services, confirming that people want to do things.
“Households pared back their online shopping and spent more at restaurants and bars amid a better health situation while gas stations' sales surged reflecting higher prices at the pump,“ Lydia Boussour, lead U.S. economist at Oxford Economics, wrote on Wednesday.
This behavior seems counterintuitive considering all of the bad news that seems to be out there. Shouldn’t people be staying home, upset about all that’s wrong in the world?
Glenn Fogel, CEO of Booking Holdings, offered some perspective. While speaking at a conference on March 8, Fogel addressed the impact of Russia’s invasion of Ukraine on travel behavior. Emphasis added.
I've been at my current company for 22 years, and I have seen events happen and whether natural disasters or human driven disasters like we’re currently seeing, unfortunately. …As things happen that impact travel, usually it’s local. The only thing that hasn't been local was the pandemic. And that's the one that was global. This is a terrible, tragic, local event. I do not believe that people in the United States — as much as they empathize and sympathize and feel angry and sad about the event — are going to change their travel plans at all. The family in Des Moines that was planned to go to Florida to take the kids to Disney World is not going to change based on this. The same thing in Asia. …People are of course horrified. Many. But they're not changing their travel. And they're much more concerned about travel right now with the pandemic because Omicron in Asia is still a problem.
Fogel makes an important point: People can simultaneously be concerned about what’s going on in the world while also living their lives.
His example about the family taking the kids to Disney World is notable. Parents want their kids to have a good childhood filled with happy memories, not just tragic ones. So they’ll work, earn money, and create opportunities to do more for their kids than simply putting food on the table.
Say what you want about whether people should be spending like this amid all that’s bad in the world. For investors, what matters is they are spending, and that’s bullish for the economy, corporate earnings, and stock prices.
I’m not going to get too much more philosophical here. All I’ll say is that people don’t always do what you expect them to do. When people have the financial capacity to treat themselves or someone they care about, they often will.
Speaking of financial capacity, consumers are still sitting on trillions of dollars worth of excess savings that they can spend. This is helping to pay for the rising costs of goods and services.
“The current surge in non-discretionary inflation — particularly food, energy, and shelter — will pressure households' budgets and lead them to pare back their discretionary purchases, while supply-chain issues will continue to constrain sales growth,” Boussour noted. “But robust labor income growth, record levels of household wealth and ample excess savings worth 13% of GDP mean that consumer spending should remain supported in the months ahead.“
Relevant reading from TKer:
🤦♂️ Btw, it’s hard to beat the market: In a report published on Wednesday, S&P Dow Jones Indices analysts found that 85.1% of U.S. large-cap equity fund managers underperformed the S&P 500. It was the 12th straight year that more than half of the managers in this category lagged the index. For more on this, read this.
🏛 Fed hikes rates: The Federal Reserve raised its target short-term interest rate range by 25 basis points (bp) to 0.25%-0.50%, from 0%-0.25%. This is the first rate hike since 2018. While the decision had been almost universally expected for quite a while, it nevertheless represented one of the more consequential moves in recent history to tighten monetary policy. Fed chair Powell believes that tighter monetary policy will be able to cool inflation without causing unemployment to jump. For more on this, read this.
🏡 Mortgage rates jump: From Freddie Mac: “The 30-year fixed-rate mortgage exceeded four percent for the first time since May of 2019. The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year. While home purchase demand has moderated, it remains competitive due to low existing inventory, suggesting high house price pressures will continue during the spring homebuying season.“
🏘 Home sales fall: On Friday, we learned that the pace of existing-home sales, or the sale of previously owned homes, fell 7.2% from January to an annualized rate of 6.02 million units in February.
💰 Stock buybacks hit record high, but the level is close to average: From S&P Dow Jones Indices senior index analyst Howard Silverblatt: “Q4 2021 share repurchases were a record $270.1 billion, up 15.1% from Q3 2021’s record $234.6 billion expenditure and up 106.8% from Q4 2020’s $130.6 billion… Buybacks as a percentage of market value increased to 0.67% from 0.64% in Q3,’21 (Q2,’21 was 0.55% and Q3,’20 was 0.37%), the long-term average 0.64%.“ For more on buybacks, read this and this.
🔄 Unretirements are up: Tom Brady isn’t the only person returning to work after retiring. According to the Indeed Hiring Lab, the percentage of people who retired but subsequently went back to work has been on the rise. For more, read this.
Up the road 🛣
The week comes with monthly updates on new home sales, durable goods orders, and consumer sentiment. All are critical metrics, but there’s nothing to suggest the known trends are changing. Homes have been in high demand, but shortages and rising mortgage rates could cause the market to cool. Durable goods orders have been healthy, but persistent supply chain issues have been hindering shipments. And consumer sentiment has been in the dumps because of high inflation.