Matthew Chapter 24 verse 35 states, "Heaven and earth will pass away, but my words will never pass away."
The word of God has been around, well, since humanity has existed. It is interesting that as nations over thousands of years have perpetually destroyed parts of their history, whether as a form of tyranny to control their people, or through wars from opposing nations, that God's word has endured all the while. As a Christian, this is one of the reasons why I believe the Bible is God's word as what it says is true, and it is the only book that has successfully predicted the future.
Just like God's word, there are truths to investing. I recognize that markets ebb and flow (with today's daily ebbing and flowing fluctuating 5-10% on a daily basis for aggressive growth investors). But over time, winners will be valued based on the premiums that they deserve, and losers will gravitate towards a commodity-based cyclical stock price performance.
If there is one thing that is clear over the past 25-plus years since 1995, it is that the consumer is a reliable indication of the degree of economic cycle corrections and recessions.
To this point, it is important to recognize that the consumption of goods through retail and foodservice sales include both essential and non-essential items. To be clear, we all need a place to live, transportation , food to eat, and clothes to wear. But there are also many items driving retail and foodservice sales consumption that are discretionary. It is to this point that gauging consumer purchases of goods can be very insightful as to the severity of macroeconomic cycles, since discretionary items are the first to go during hard times.
As an example, the data, that is taken from the U.S. Census, does not include home purchase or rent, nor does it include services costs like Internet access or energy services, all being essential. It does include the purchase of vehicles, furnishings and home décor, and food and clothing needs, among many items across retail stores and nonstore and E-commerce platforms. As such, there are varying degrees of discretion across households within the U.S., all which are reflected by the data on a monthly basis.
The chart above has organized retail and foodservice sales performance across periods of time to provide investors with a sense of how resilient the consumer really is. For instance, during the Dotcom Recession (Bar three), average monthly retail and foodservice sales growth from the prior year averaged nearly 3% during the lowest growth period. During the Commodity Recession of 2015/2016 (Bar seven), the average monthly retail and foodservice sales growth from the prior year averaged closer to 2.5%. Technically, there was no broad-based economic recession, but clearly the Commodity Recession (also including manufacturing/industrial/freight recessions) had a greater negative impact on the consumer. The pre-pandemic average monthly retail and foodservice sales performance has stood at nearly 4% (Bar one), a duration of 290 months or 24 years.
Ironically, the pandemic year of 2020 (Bar nine) was the second worst performing period other than the Great Recession (Bar five). During 2020, retail and foodservice sales were flat, while during the Great Recession, the monthly average was near negative 5%. However, the irony is that the Pandemic Era period (Bar twelve) has witnessed retail and foodservice sales performance exponentially stronger than any period over the past 25-plus years, with average monthly growth of 12.5% during a 27-month duration. To this point, it is important to consider inflation and volume performance accordingly.
Everyone today is aware of the inflationary pressures that consumers are facing. Food and energy costs have led the way, but there really are no areas that have not been impacted by increasing inflation. To this point, I have included the CPI for all items, food, and commodities less food and energy commodities as a comparison against retail and foodservice sales.
Before transitioning to retail and foodservice sales volume, it's important to note that inflation has really taken off since April 2021. ISince January 2005 and through March 2021, inflation averaged monthly growth at 2%, while retail and foodservice sales averaged 3.5%. Since then and through May 2022, inflation has averaged 6.5% with three consecutive months averaging near 8.5%. Clearly, investors need to consider the impacts of this.
Investors should note that there is a way to approximate the volume from retail and foodservice sales. The simple math is to take the rate of inflation growth and subtract it from the rate of retail and foodservice sales growth - the delta being the approximation of volume. This is very important as it gives us a better sense of pricing and volume. It also helps illustrate the relationships of volume trends against macroeconomic cycles, which is key to where we are today.
The easiest highlight is the Great Recession where for 24 consecutive months, retail and foodservice sales volume was negative with the monthly average at negative 6% and a low of negative 11%. Today, the most current data has displayed a negative trend the past three months, averaging negative 2.6%. Three consecutive months of negative retail and foodservice sales volume performance may not seem like much, but aside from the initial pandemic impact during the spring of 2020, this has not occurred since the Great Recession.
This is an important point as many experts are debating the severity of a looming recession with some thinking it will be brief and others thinking it will be more severe. For investors, it is extremely important to continue to track the monthly progress of retail and foodservice sales to get a clear sense of the trends and markets.
With this in mind it is equally important for investors to recognize the core drivers for why inflation is where it is and what are the variables that could continue to lead to a worse economic outcome. It's really difficult not to get politics into the equation as government policies across the globe are the root of the cause for today's inflation.
By shutting down economies and severely impacting supply chains, there is no way that inflation (supply side derived) was not going to occur. The more recent geopolitical instability and war between Russia and the Ukraine has also impacted inflation, especially on the energy side. But to equate the pandemic policies the past couple years to a "conventional" inflationary economic cycle is simply a flawed correlation, as today's inflation has been manufactured, irrespective of conventional supply and demand dynamics.
As can be seen from the chart above, when excluding nonstore retail sales, mostly comprised of E-commerce, there are clear areas where restrictive policies had a detrimental negative impact on the consumer and economy. California, as a core state with some of the most restrictive policies is a great example of this with the state seeing some of the worst negative performance nationally for its retail and foodservice sales during 2020, and despite the higher results during 2021, lagging performance for the double-stacked 2019-2021 period against the nation as well.
Even within the state, taking Southern California as a regional example, counties like Los Angeles, predominantly overly restrictive, and Orange with varying levels of restrictions, witnessed far worse performance versus counties like Riverside and San Bernardino which had far less restrictive actions. In the case of Riverside County, retail and foodservice sales only declined marginally by 1% during 2020. This isn't meant to push any politics or ideals, it's simply a fact that restrictive policies were the predominant reason for economic ruin. Wealth disparity and inequality has only grown exponentially more severe as a result in major urban and metropolitan areas across the U.S., while areas outside of urban cores have seen more normalized results back to pre-pandemic performance.
Why it Matters
The U.S. is in a position to strong-arm players who are using their policies to negatively impact our economy. China is clearly using these tactics as the country now has a 0% COVID policy over the next five years. This is interesting as the pandemic is now endemic and just like the flu, a regular occurrence for perpetuity - it doesn't matter whether vaccinated or not, or how boosted anyone is, the risk of getting COVID is ubiquitous. The news reports what it does, but all of us now have enough experience from our families and communities across the globe to clearly understand what is happening, regardless of political affiliation - the truth is there.
This poses a key risk for the U.S. economy - that the administration will not be aggressive enough to thwart opposing nations bent on negatively impacting the supply chain, this even goes to Russia's militant actions and the U.S.'s lack of action. As we've seen during the pandemic craziness, the U.S. is having unprecedented challenges in protecting its own people within, as well as critical food supply chains and other resources. We are already seeing certain states like California that are passing legislation to further add to the severity of inflation by regulating transportation markets further to boot. AB5 is a clear example of how the state will potentially exacerbate the inflation issue on the freight side. As the politics of restrictive states and the federal government do what is not in the consumer's best interest, prolonged inflation is a potential outcome.
The past 25-plus years have witnessed multiple economic cycles and events that have impacted consumers, with none more severe than the Great Recession. Second to that was the Commodity Recession during 2015/2016 despite no macro-recession occurring. The pandemic has served as an anomaly with the Pandemic Era seeing some of the strongest retail and foodservice sales performance in history, with the past three months being skewed by inflation. Investors will be best suited paying strict attention to how retail and foodservice sales, inflation, and the delta of volume continues to play out. While not predictive of the future, there will be a key point where the bottom will become evident.
As has been the case for major aggressive growth winners over time, companies will stand out that can continue to innovate irrespective of these economic cycles. We already saw the resiliency of companies during the pandemic - many of these winners are still outperforming the substantial majority of all individual company investment options. As these unique trends become stronger for winners, the market will be forced to re-evaluate and revalue them from today's discounted levels. It isn't easy being patient for this outcome to occur, but the reward is always well worth it.