Loving the work of Steven Blitz at TS Lombard at the moment. This is spot on.
In January, everyone ate out. Now we know why 23% of January job gains were in restaurants and bars – 50% of January’s rise in retail sales ex autos and gas came from spending at food and drink establishments. These are, of course, seasonally adjusted numbers. Unadjusted, spending declined in January and so too did the number of people working at these places – they just didn’t decline as much as in January 2022. Lower gasoline prices, higher equity valuations, and a warm January all played into the drive to eat out. Market participants are wanting to believe the economy is reaccelerating, and there are some reasons to think so, but it is best to wait for February and perhaps even March data before deciding. Yes, the Fed hikes in March, probably in May too, and will keep going until unemployment rises and then realizes they went too far. Why should this cycle be any different?
If the economy is reaccelerating, the Fed is complicit by giving license for markets to rally as they slowed rate hikes from 75 to 50 to 25 –the market’s timeline of the Fed’s “stop and reverse” flattened and shortened. There is a strong tie between discretionary spending and the equity market, especially when total income growth is trending along a smooth path. The US is an equity culture — equities are broadly held in the dominant form of pension plan (defined contribution – 401Ks, etc), where balances are visible daily. Near 75% of these pensions are invested in direct equities and mutual funds. Defined contribution pension funds (401Ks, etc) totalled $7.8 trillion in September 2022, compared to $3.7 trillion in defined benefit pensions (the dominant plans up until the mid-90s). Other than balance sheet effects influencing sentiment, equities themselves are a strong signal from which consumers take direction before making large leveraged purchases.
