The wealth effect is bigger than ever

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Markets are making the news, not the other way around, no matter what we believe in the news sector (or what we might want to believe about ourselves).

After the eighth consecutive week of consecutive wins of the Dow Jones Industrial Average, it would seem incongruous that equities and other risky badets extend their 2019 advance despite seemingly catastrophic economic reports. But that may be because Main Street's weakness was a reaction to Wall Street's weakness in the last quarter of 2018.

Retail sales dipped in December, the Commerce Department said late in a statement delayed by the federal government's closure. The 1.2% drop was so far removed from economists' forecasts that some dismal science practitioners said the government's data was simply wrong.

Philippa Dunne and Doug Henwood, editors of the LRT in the advisory opinion on the economy, point out that the monthly publication of retail sales is perhaps the most revised report published by the government. Despite everything, it was a shock.

Due to the sales deficit, GDPNow's estimate of the US Federal Reserve's fourth-quarter economic growth in Atlanta was reduced to an annual rate of only 1.5%, after inflation of 2.7% . This is a significant decline between the respective growth rates of 3.4% and 4.2% in the third and second quarters.

The closure of the federal government, which began on December 22, just before the last shopping weekend before Christmas, probably played a role in the steep drop in retail sales. But the stock market, which was already in sharp decline, may have reduced its spending in December.

As reported in this article on January 25, Goldman Sachs economists have found that stock price declines are now having a much larger impact on spending than in the 1980s. account for a much larger share of badets, not only the richest 1%, which accounts for 50% of household stocks, but also middle to upper clbades. Bank of America economists Merrill Lynch, in a research note last week, also traced the decline in retail sales resulting from mbadive stock market sales in December. Monitoring BofA's internal data on debit and credit cards showed that spending was at its lowest level since 2016, when the economy had sunk into recession.

The good news, however, is that trackers on the ground are signaling early on that the consumer's mind has since been raised, as has the Dow. Cornerstone Macro, led by former economist Nancy Lazar, finds that its own exclusive measure of consumer confidence has almost completely reversed its previous drop, which was reflected in the reported drop in December retail sales. The most optimistic attitudes would be consistent with the $ 4.9 billion increase in the value of the US stock market since its low point on Christmas Eve, according to Wilshire Associates.

The shortened holiday week should also provide more delayed stop data. The December durable goods advance is expected to post a strong gain, boosted by an increase in aircraft orders, which is lumpy month-to-month. Existing home sales in January are perhaps even more revealing, after falling from 6.4% in December to the lowest in the last three years. Pending home sales in December were down 20 percent from the previous year, notes Morgan Stanley. The bank's economists also noted that declining consumer confidence as a result of the stock market downturn could weigh on January's leading economic indicators index.

What has rocked the stock market more than anything is the move of the US Federal Reserve to rising interest rates in 2019, which was first exposed by Fed Chairman Jerome Powell January 4th and formalized at the Federal Open Market Committee meeting on January 29th. The minutes of the meeting will be published this week and could further enlighten the monetary authorities. Meanwhile, concerns over a trade war have eased, with talks between the United States and China appearing to be moving forward, although Europe still faces a myriad of political problems, including on the deadline set for Brexit in a little over a month. The resulting dollar increase should at least prevent the Fed from showing restraint. This should be positive for stocks, and therefore for expenses.

Write to Randall W. Forsyth at [email protected]