Where Are the Exits?

global market sentiment is uncertain

Just as the ASX 200 approaches 6000 points for the first time in years, we get more evidence of a patchy Aussie economy.

Last week, retail sales data for September came in unchanged from the month before. The consensus forecast was for 0.4% growth. That follows two months of falling sales. In other words, retail spending has fallen over the September quarter.

It’s grim out there in retail land, as The Australian reports:

Poor demand from consumers has forced retailers into the biggest price cuts since 2004, challenging both Treasury and Reserve Bank forecasts of a lift in spending. 

Retailers have had a horror quarter, with sharp falls in sales in both July and August and no change in September. Sales have been soft in all sectors and fell in all states. There has now been no increase in monthly sales revenue since March and the annual growth rate of 1.4 per cent is the weakest since 2013.

But the stock market doesn’t seem too concerned. Check out the chart of the ASX 200 Consumer Discretionary Index [ASX:XDJ] below…

Source: Optuma
[Click to enlarge]

It’s once again trading around the post-2008 highs. It’s pretty much rallied in a straight line over the past month, hitting resistance at the 2016 and 2017 highs.

This bullish performance seems at odds with such poor recent data from the retail sector.

There are two ways to interpret this…

Perhaps the market is too sanguine and is not judging the risks properly. It believes that low interest rates will save the day and, as such, consumer discretionary stocks are a good bet.

Or, consider that the market is forward-looking. The weak September quarter data is old news, and the market accounted for that by falling from June through to September. The recent rally is in this case predicting stronger consumer spending in the months to come.

Which is it then? Is the consumer under the pump, struggling with large debt levels, stagnant wages, and rising prices? Or are things a little better than the headlines suggest? 

While everyone has a view (based on your particular bias, bullish or bearish) no one really knows.

The bottom line is that the picture is indecisive. Consumer discretionary stocks are bumping up against the ceiling. They might correct from here, or could keep pushing higher.

Instead of guessing which way things will go, I’d prefer to wait and see. Let the market tell you which way things will go, and then make some investment decisions from there.

Also, keep in mind that not all consumer stocks are created equal. The sector includes retail stocks as well as consumer services, media, automobiles and components, and consumer durables and apparel. So retail stocks are only a portion of the sector.

For example, both Myer Holdings Ltd [ASX:MYR] and REA Group Ltd [ASX:REA], owner of realestate.com.au, are in the consumer discretionary index.

As you can see in the chart below, over the past 12 months REA is up more than 50% while MYR is down more than 30%.

Source: Optuma
[Click to enlarge]

Clearly, real estate advertising is a better place to be than department store retailing.

The threat to department stores is structural, but you also have to wonder whether the slowdown in the housing market points to a cyclical slowdown on other consumer discretionary stocks.

That’s why it’s important to watch the index and let it give you clues. A break above the old highs will be bullish. It will tell you the weakness in retail is either short-lived or more structural as spending shifts online. That would tell you retail weakness is not emblematic of broader consumer (and therefore economic) headwinds.

On the other hand, a correction from here would tell you to remain wary, and that the consumer is indeed struggling in the current environment. And because consumption accounts for around two-thirds of economic growth, that’s an issue.

Meanwhile, in the US there is no equivocation. On Friday, Apple closed at another record high, and the volatility index closed at a record low.

Investors simply aren’t worried about anything. Which means the market isn’t priced for any kind of worrying event. When you get such pervasive optimism, it is indeed a time to be worried.

Where are the exits?


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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