Terrible Redbook Reading
We have differing data on the latest trend in consumer spending. Earlier this week, Mastercard released spending data in its 8K filing. This updated data is paramount because the economy has changed so much in the past few weeks. Switched volume growth in the week ending May 28th was -8% which was the same as the previous week.
In the United States volume growth improved from -3% to -1%. Worldwide volume growth excluding America improved from -14% to -13%. Growth on Mastercard’s network and on Visa’s network improved this month which is obviously a good sign.
The situation wasn’t as good in the Redbook report which has more updated data. In the week of June 6th, same store sales growth fell from -7.2% to -9.7% which was one of the worst reports in history. If consumer spending growth falls in June, it will be a disaster for the bulls because they believe the recovery will be smooth sailing. If the recovery goes fine, we don’t see much upside left in stocks.
If the recovery doesn’t go fine, there is a lot of downside. My best explanation as to why consumer spending growth might fall in June is that when people go back to work, they start making less money than when they were on unemployment. Consumers have less debt and higher savings which is why I’m more optimistic on consumer spending than this Redbook report.
Many are bearish on stocks because of what’s priced in. Think of a great company that trades at a PE multiple of 60 despite only having expected EPS growth of 10%. Even though you may think EPS growth will be 13%, you still can’t buy the stock at that price. If you make a habit of overpaying for things, your long term performance will suffer.
Improved Small Business Confidence
Small business confidence is amazingly high when you consider how weak the economy is. Many small businesses can’t operate normally, yet they are still optimistic. Overall index rose from 90.9 to 94.4 which beat estimates for 92. It beat the highest estimate which was 92.4. Every indicator within the report improved except 2.
Biggest improvement by far was in expectations for real sales to be higher. Net percentage increased 18 points to -24%. As you can see from the chart below, the net expecting the economy to improve rose 5 points to 34%. It’s amazing how close this is to the spike after the tax cuts. It makes sense small firms would think the economy can improve from being in disarray.
Plans to increase employment rose 7 points to a net 8%. In May, the jobs added were people coming back from temporary losses. We don’t even need to see new jobs created to get the unemployment rate to the mid single digits. We just need most jobs to come back and a limited amount to be permanently gone.
Current job openings index fell 1 point to 23%. The earnings trends index fell 6 points to -26%. This index is usually negative, but this is fairly low which makes sense because many are either closed or being limited somehow.
More Consumer Data
According to OpenTable, on June 8th restaurant bookings growth was -75%. There hasn’t been any improvement in the past 4 days. It will be very interesting to see how the data does after New York City opens further. Its Phase 2 plan to reopen starts in July. In July there will likely be less than a 50% decline. For restaurants that are open, growth was 56%. That’s not a shock because there is pent up demand and limited supply. Obviously, the ones that are opened will do well.
Wendy’s is showing improvement as well. It seems like a lifetime ago when Wendy’s stock was down 69% from its peak. Since the bottom, Wendy’s is up 208% as it is only down 4% from its February peak. In the final week of May, U.S. comps were -1.9%. That’s not much better than the -2% comp in early May, but growth was hurt by the beef shortage. April comps were -14% with the worst reading being -25%. Now that most states are open again, we can’t break down the results from the open and shut states.
The table above shows the traffic at U.S. retailers. As you can see, growth has been steadily improving. In the first week of June, traffic was -69.7% which is 6.5% better than the last week of May. It’s obvious this growth will steadily improve as states reopen, stores reopen, and people become comfortable with going out. That’s why it’s better to look at overall spending to see how much of a hit online sales are taking. It’s still a good sign to see traffic falling at a lower clip.
COVID-19 Becoming A Problem
Coronavirus isn’t over. It’s just the shutdowns that are almost over. If the virus is still causing thousands to get sick in a few states, their economies will be hurt. Businesses will be opened, but fewer people than normal will go out. There are currently 14 states seeing an increase in cases. The chart below shows the most concerning ones. Obviously, California is a big problem since it’s the most important state economically. It had 3,045 new cases on June 9th and 96 new deaths.
Texas is also an issue as it had 1,096 new cases and 24 new deaths. It seems like the cases in America didn’t fall as quickly as in other countries. That might be because the country is so large. We are seeing New York and New Jersey do incredibly well, while states that didn’t get hit initially are now struggling.
New York only had 768 new cases and New Jersey only had 275 on the 9th. National deaths spiked from 586 to 1,093, but in general they have been falling quicker than new cases.
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