I had to chuckle when I saw how surprised the Wall Street media crowd was by Thursday’s monthly retail sales report for December. The consensus of economists guesses for the month was for a 0.2% increase. Instead, they got smacked with a drop of 1.2% in the seasonally adjusted headline number. How could they have been so wrong?
The funny thing is that if they had been paying attention all these years, they would know that, retail sales track the stock market with a slight lag. No surprise there. Most economic indicators track the direction of the stock market with a slight lag. That’s because the market is one of the primary signaling mechanisms for consumer behavior.
House prices are another, but stock prices are far more visible, particularly to the big spenders who are the ones who move this number around at the margin. They own stocks. When stocks go up, we feel richer and we spend more. When they go down, we pull in our belts. Most people who don’t own stocks are spending to subsist. They typically don’t have much discretionary income so their spending patterns don’t change much. They’re the stable base of retail sales. Stock owners are the swingers who spend more when the market is up, and vice versa.
I guess it boils down to this. The stock market is the economy. So why bother following economic data when the stock market tells us all we need to know? Mainly because the Fed watches both. The Fed cowers when the market declines, and it cowers when economic data shows up with a negative “surprise” that shouldn’t have been a surprise.
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