Retail sales key to U.S. growth

November marks the beginning of the holiday shopping season. How important is retail and can it keep the current stock market rally going?

While headlines continue to focus on the words and actions of central bankers and politicians, it’s the U.S. consumer who continues to bear responsibility for keeping the U.S. economy on its steady but modest GDP growth track.

Read: 5 consumer trends to watch

The pre-financial crisis high-water mark for retail sales was $378 billion, recorded in November 2007. Retail sales reached a record $427 billion in August of this year, despite the headwinds of high domestic unemployment, income tax increases, rising interest rates and the most recent shutdown of the federal government.

Acknowledging the consumer’s leading role in keeping the U.S. economy moving forward, revenue and profit trends within the consumer discretionary sector are influential on the overall direction for the U.S. and ultimately the Canadian stock markets in the next several quarters.

Looking ahead, earnings from the U.S. consumer discretionary sector are expected to dip slightly in the third and fourth quarters before rebounding in first quarter of 2014. Revenue growth among consumer discretionary corporations is expected to rise during the unfolding third quarter reporting earnings season and then hold between 15% and 18% from Q4 2013 until Q1 2014, according to consensus analysts’ estimates.

Since the start of 2009, the consumer discretionary sector has by far been the top-performing sector in the broad S&P 500 index. At times, the consumer has appeared to operate independently of factors that influence the economy. With the Fed’s taper plans appearing to be on hold due to the Washington slowdown, investors must look to the U.S. consumer during the rapidly approaching holiday shopping season to propel stocks higher than where they stand today.

Read: Janet Yellen: the teenage years

There should be little doubt that the bull market in stocks remains fundamentally reliant on the ability of U.S. households to help drive revenue and profit growth for consumer discretionary companies. U.S. consumers are empowered only to the extent they are underpinned by positive fundamentals, such as the number of new jobs and increasing household wages. For this reason, investors must continue to closely follow U.S. labor market developments in the months ahead.

TRADING WEEK AHEAD

The last week of October will see a heavy emphasis on corporate results in both Canada and the U.S. as earnings season continues.

There will also be a focus on the policy meetings and subsequent statements from the Federal Reserve and the Bank of Japan. The Fed policy statement should reveal more on the FOMC’s read on the economy and what lasting impact there may be from the recent government shutdown.

The market hopes to understand the timeline of the Fed’s “first taper” that we believe is at least a late Q1 event, if not later.

On Monday, the U.S. reports September’s industrial production, capacity utilization, and pending home sales data.

On Tuesday, Canada reports September’s industrial and raw materials prices while the U.S. reports September inflation, retail sales, and consumer confidence data.

On Thursday, Canada announces August GDP figures as well as average weekly earnings while the U.S. reports weekly initial jobless claims and October Chicago PMI.

The week’s data deluge concludes on Friday with U.S. ISM Manufacturing and total vehicle sales.

Read: Fed tapering encourages a dovish BoC

David Andrews is the Director, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @David_RGMP