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The U.S. Week Ahead (May 11-15): Retailers Cling to the ‘American Dream’

By:

Senior Market Analyst at Interactive Brokers

Market participants in the week ahead will receive further updates about the state of retail sales, as containment measures to prevent the spread of Covid-19 continues to batter the economic landscape.

Retailers have generally been reeling amid government-mandated restrictions to stave off the novel coronavirus, forcing a record wave of furloughs, and halting brick and mortar operations across a vast part of the country.

Labor market crashed amid COVID-19 Containments - Services Suffer Most

The mammoth drop of 20.5m total nonfarm payrolls in April, for example, was underscored by a 7.7m plunge in leisure and hospitality jobs, as well as 2.1m retail employees, representing nearly half of all losses, according to the U.S. Bureau of Labor Statistics.

Within these sectors, employment plummeted in the arts, entertainment, and recreation industry (-1.3m), accommodation (-839k), clothing and clothing accessories stores (-740k), motor vehicle and parts dealers (-345k), miscellaneous store retailers (-264k), and furniture and home furnishings stores (-209k).

The figures contributed greatly to an historic spike in the unemployment rate to 14.7% from 4.4% in March – reaching the highest rate and largest over-the-month increase in the history of the series dating back to January 1948.

Should I Stay or Should I Go?

Against this backdrop, uncertainties over certain restrictions, such as ‘stay-at-home’ policies, have arisen in certain areas hard-hit by the fatal respiratory disease.

In New York, for example, recent hospitalizations show that many who were self-quarantined were among those infected.

On May 6, the state had received 1,269 survey responses from 113 hospitals over three days and found that most Covid-19 cases comprised individuals who were not working or traveling, were located downstate, were minorities and “older” people, were non-essential employees, and were predominately at home.

New York has been widely considered the epicenter of the Covid-19 illness, with almost 327.5k cases confirmed and more than 26k fatalities to date, according to data from the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University.

Although the grim picture of unemployment has been largely caused by coronavirus-inflicted containment measures, business conditions may be shifting to resemble the pre-pandemic era more closely.

For instance, several states are either currently planning, or have already partially reopened their economies, including Arizona, Florida, Georgia, Maine, Ohio, Pennsylvania, South Carolina and Texas.

Retail Sales on downward spiral

Lynn Franco, senior director of economic indicators at The Conference Board, noted that consumers’ short-term expectations for the economy and labor market improved in April, “likely prompted by the possibility that stay-at-home restrictions will loosen soon, along with a re-opening of the economy.

“However, consumers were less optimistic about their financial prospects and this could have repercussions for spending as the recovery takes hold,” while uncertainties over the economic effects of Covid-19 will likely “cause expectations to fluctuate in the months ahead.”

Learned Helplessness

Traditional retail shops had been threatened by on-line consumerism long before the novel coronavirus pandemic, and some fear the psychological and emotional fallout from social distancing and ‘stay-at-home’ policies may pose greater challenges for physical stores even after restrictions are lifted.

Richard Curtin, University of Michigan’s Surveys of Consumers chief economist, argues that the “current pandemic mood of consumers cannot be easily or quickly reversed,” in part because the “impact of mood results from its influence on how information is processed and what evaluations are automatically attached to the information prior to conscious awareness.”

He added that “moods do shift and transform how information is perceived,” exemplified by ‘The American Dream,’ which exerted “a significant impact on how economic information was processed and how positive interpretations were automatically attached to ongoing economic developments.”

consumer sentiment crumbles

Fewer shoppers at physical stores would certainly dampen certain companies’ revival prospects, such as real estate investment trust (REIT) Simon Property Group (NYSE: SPG), which has been reportedly in the process of opening dozens of malls in parts of the country where restrictions have been eased.

Simon Property – which owns malls where store closures and bankruptcies such as J. Crew, Neiman Marcus, Papyrus and Forever 21, have been growing more frequent – said in mid-March it would close all of its retail properties, including malls and premium outlets until March 29.

The REIT had also refinanced a US$6.0bn credit facility and term loan, which CEO David Simon said “enhances our already strong financial flexibility.”

While the company said it has around US$9.5bn worth of total credit capacity, Simon Property Group’s stock has fallen nearly 61% year-to-date in 2020, and market perceptions about its creditworthiness have collapsed since mid-January, with prices on its 5-year credit default swaps (CDS) having soared around 526% to nearly US$260.

Staying Online

The pandemic-laden anxiety among consumers, which is likely to foster an aversion to crowded areas, could bolster online retailers’ sales if practices of emergency savings, cash hoarding and necessity-shopping does not impede overall appetite.

online retailers continue to show positive returns in 2020 YTD

Year-to-date in 2020, exchange-traded funds (ETFs) such as industry disruptor ProShares Long Online/Short Stores ETF (NYSEARCA: CLIX), Proshares Decline of the Retail Store ETF (NYSEARCA: EMTY), as well as the Amplify Online Retail ETF (NASDAQ: IBUY), have seen positive returns of around 39.0%, 22.2% and 16.3%, respectively.

Meanwhile, the SPDR S&P Retail ETF (NYSEARCA: XRT), as well as the First Trust Nasdaq Retail ETF (NASDAQ: FTXD), which are more heavily weighted toward the non-internet retail sector, have suffered negative returns of around -20.0% and -14.4% over the same period, respectively.

The U.S. Census Bureau said that due to Covid-19-related events, “many businesses are operating on a limited capacity or have ceased operations completely.”

Advance estimates of U.S. retail and food services sales for March fell 8.7% from the prior month and 6.2% year-on-year, to a little more than US$483bn.

Economists surveyed by Bloomberg generally foresee retail sales falling by 11% in April from the previous month, while the University of Michigan’s Index of Consumer Sentiment is likely to slip to 67.5 in May’s preliminary report from 71.8 in the prior month.

Both reports are set for release Friday, April 15.

On the Calendar:

Mon, May 11

Tue, May 12

  • CPI (Apr)
  • Monthly Budget Statement (Apr)
  • American Petroleum Institute (API) Crude Oil Stocks
  • Philadelphia Fed president Patrick Harker Speech
    • COVID-19 Impact on Key Delaware Industries: What the Philly Fed Is Seeing and What We May See in the Future
    • Delaware State Chamber of Commerce, 10:00 a.m. EDT
    • Audience Q&A: Yes; Media Q&A: No
  • Earnings:
    • Vector Group (NYSE: VGR)

Wed, May 13

  • PPI (Apr)
  • U.S. Energy Information Administration (EIA) Crude Oil Stocks
  • Earnings:
    • Dillard (NYSE: DDS)
    • Jack in the Box (NASDAQ: JACK)

Thu, May 14

  • Initial Jobless Claims (Weekly)
  • Import/Export Prices (Apr)
  • Earnings:
    • Denny’s (NASDAQ: DENN)

Fri, May 15

  • Retail Sales (Apr)
  • University of Michigan Consumer Sentiment (Prelim – May)
  • New York State Manufacturing Index (May)
  • JOLTs (Mar)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

event calendar IBKR TWS
Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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