Economists Can’t Forecast Retail Sales, But You Have an Edge Because You Can

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?

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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.

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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.

Here’s how you can gain an edge by knowing this information.

Knowing What the Fed will See Before It Sees It Gives You An Edge

There may be some value to us if we see what the Fed will see before the Fed sees it. For trading purposes at least, there lately seems to be some value in anticipating what the Fed will say before it actually does anything. The stock market has had an enormous move in a very short time simply on the basis of traders anticipating what the Fed might do, when it has actually done nothing.

And probably won’t do anything.

Look at this chart of the headline number for retail sales along with stock prices. The upper half is the totals for each. The lower half shows the annual rate of change. Study that chart for a moment. It speaks for itself. Stock prices lead. Retail sales follow.


The stock market tanked from October through late September. The only surprise is that economists pay so little attention to the real world that they didn’t see this coming. Most of them never see anything coming. There are a few that do, but the Wall Street media tends to marginalize them. Wall Street likes to focus on what “everybody” is saying.

Meanwhile, even the Fed may have been mildly stunned by this report. Yesterday, Fed Governor Lael Brainard was crying in her beer, opining that the number was a “mess.” She’s worried about “downside risks” to the economy. She wants normalization to end by later this year. It seems that the Fed will move gingerly toward reducing its balance sheet normalization schedule, ending it before it returns to a normal tight reserve position, which would be some time in 2020.

However, as I’ve pointed out several times, I do not think that reducing the rate of draining money from the system, or even stopping it, will help the outlook for stocks. The market will still need help in absorbing the massive flow of Treasury supply that will be pounding away for years to come.

The Fed would need to actually print and pump to do that, and it’s nowhere near that decision. That would mean a return to QE, and such a dramatic move would seem to require that a financial or economic accident come first.

Here’s How We Know That January Sales Will Rebound

Given that retail sales follow the stock market, and given the strong wage inflation numbers in recent months, January retail sales should show a sharp rebound. While the Fed is very nervous right now, the February numbers should encourage the FOMC to stay the course with its balance sheet shrinkage.

That of course will ultimately lead to a bearish market reaction. It would be the very accident the Fed would need as an excuse to reverse policy and restart QE. In my view, the accident must precede the action.

The issue, as always is timing. We rely on technical analysis for that. So far, the indicators and projection techniques that I use are not yet pointing to the next decline being imminent. But they also suggest that there isn’t much upside left in this rally (check out my Liquidity Trader).

We need to be vigilant. In my Technical Trader reports, I had been recommending holding SPY calls since early January, but I think that game is played out. There’s a SPY put trade on the way, but not yet.

Meanwhile, both the Fed and consumers and business decision makers are watching the stock market for clues to what to do next. At the same time, investors and traders are watching and anticipating the Fed’s next move. The Fed is in turn watching them, as expressed in the direction of the stock market. It’s like a dog chasing its tail. Or a circular firing squad.

All the while this is going on, available market liquidity is being stretched to the hilt as dealers, traders, and investors buy stocks and Treasuries on credit. The Primary Dealers in particular have entered into uncharted waters with the astronomically rising size of their Treasury long positions. Without the constant flow of new Fed cash to their accounts, the dealers must finance these purchases with leverage.

While The Fed Dallies, Leverage Is Running Wild

There’s another sign of the increased use of debt financing and leverage driving these rallies. Weekly Fed data on the issuance of loans to non-bank financial institutions is a proxy for the Fed’s old line-item, loans for securities financing. Issuance of these loans has exploded since November, rising from an already rapid growth rate of 9-10% to 15%. With central bank provided liquidity falling, the rallies in stocks and bonds have been driven by increased leverage.


The risks in the financial markets increase as leverage increases. But there are ways to profit from the market while limiting your risk by keeping most of your assets in short term T-bills, and setting aside a small percentage of your portfolio for options trading, where potential profits are available regardless of the market’s overall direction. In fact, some of the biggest and fastest options trading profits often come on the downside.

Our trading research gurus can help you find those potential trading profits week in and week out.

The post Economists Can’t Forecast Retail Sales, But You Have an Edge Because You Can appeared first on Lee Adler’s Sure Money.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

  1 comment for “Economists Can’t Forecast Retail Sales, But You Have an Edge Because You Can

  1. ArtV
    February 19, 2019 at 11:17 am

    Hi Lee,
    I have been wondering how significant individual, domestic purchases of short term bills have been during the past year and if domestic individuals might be mitigating the effect of increased treasury issuance.
    I frequently read the comments section on articles over at Wolf Street, and whenever there is an article about debt, I can normally find several comments about recent purchases of bills. It seems there are quite a few people like me: I opened a Treasury Direct account last year when the spread between what my bank was paying on savings and what I could get for a 13 wk bill became too great to ignore. (The small, local bank I use is still paying just .1%. Yes, one tenth of one percent.) Other, larger banks in my neck of the woods are paying 1% or less. Most of my money is now in a higher yielding savings account at my broker affiliated bank and in 13 wk bills, with the bills accounting for about half of safe and liquid cash. This is the first time in my life that I have bought treasury securities, and again, I don’t believe I am the only one who has gotten whacked up side the head by the difference in yield between bank deposits and short term bills.
    At some point I would expect the budget busting expenditures and tax cuts to take their toll, but I wonder if, in the near term, domestic demand might meet supply. (Near term: For me, increasing investment in bills this year will depend on how much I set aside from income, whereas purchases late last year were a bulk transfer from several previous years of savings, so depending on rates, I will reinvest, but treasury won’t be getting anything near last year’s amount in new money from me.)
    I know that there has been a marked increase in domestic, individual demand since last year, and along with wondering if that will help to soften the blow from increased issuance, (again, near term) I am also wondering if, as in my case, that money is coming out of savings accounts and if so, what that means for the health of smaller local or regional banks–or any banks for that matter. I know that the local bank I still have a bit of savings in has $X less collateral than it would have had if not for my bills purchase.
    Thanks for the great articles, Lee.
    And thanks for putting up with the “Bear’s Chat” for as long as you did.
    “ArtV”

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