It's Not Resilience, It's Resignation

The story from major U.S. retailers... People are avoiding big-ticket items... But they're still spending overall... It's not resilience, it's resignation... Joel Litman is back... Taking a look at sectors... Two free picks...

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The last wisps of earnings season are upon us...

We covered the latest out of China yesterday...

Today, I (Corey McLaughlin) want to touch on the other big subject we were keeping an eye on this week – the last few big reports of this quarterly earnings season. Specifically, a bunch of popular U.S. retail businesses have been giving updates, which could give some insight into the state of the American consumer.

Big-box giant Target (TGT) and discount-department-store operator TJX Companies (TJX) were up today, reporting before the opening bell. Both painted a picture of customers pulling back on discretionary purchases and looking for value.

Our Stansberry NewsWire editor Kevin Sanford wrote to readers this morning about Target, saying the company reported strong second-quarter numbers as excess inventory that it built up last year had begun to fall back to "normal levels." Kevin wrote...

Adjusted earnings came in at $1.80 per share, more than four times higher than in the same period last year. However, Target's sales declined for the first time in four years. On top of that, the retailer cut its profit outlook for the year. It anticipates consumers will continue pulling back on larger discretionary purchases such as home goods, toys, electronics, and apparel.

Meanwhile, TJX – which runs chains that include T.J. Maxx, Marshalls, and HomeGoods – said year-over-year sales grew 8% and profits jumped 23%. Reselling other retailers' surplus inventory is central to TJX's stores, and the company said it benefited as higher-end retailers unloaded their unsold merchandise. TJX also raised its outlook for the rest of the year, projecting comparable-store sales to grow between 3% and 4%.

So, all in all, the story from these two major retail companies is that pandemic inventories are burning off... and more folks would rather hit the bargain bin than jump on big-ticket purchases.

Yesterday, Home Depot's CEO added some color to the conversation, too...

In its earnings report, home-improvement retailer Home Depot (HD) reiterated its outlook for its full-year sales to drop between 2% and 5%. It also continues to project that earnings will drop between 7% and 13% from last year.

Like with Target, Home Depot said sales of big-ticket items are off significantly... with customers spending 5.5% less on products priced above $1,000. But Home Depot's CEO Ted Decker said customers continue to buy less-expensive items.

Overall, Decker said he's cautious about things the rest of the year...

We don't know... where spending in home improvement, in particular, will ultimately settle. And we don't know how the [Federal Reserve's] monetary-policy actions, which are specifically intended to dampen consumer demand, what that impact will ultimately have on consumer sentiment in the overall economy.

Decker also said in a conference call with Wall Street analysts that while a shift in consumer spending from more expensive to lower-priced items is happening...

The overall economy and the consumer in particular have remained incredibly resilient. As we all know, the economy continues to grow with a number – another great GDP print for the second quarter.

Speaking of that, the latest GDPNow estimate routinely published by the Atlanta Federal Reserve projects third-quarter gross domestic product rising at an astonishing 5.8% annualized growth rate. This follows new reports today showing increases in housing starts and U.S. industrial production.

Wow.

So far, the buzzword about consumers in 2023 continues to be 'resilient'...

That's a nice way of putting it.

To me, in plain English, if you and I or anyone else is "resilient," it's only because we feel like we need to keep spending money on things like food, energy, and health care. But I haven't met anyone who wants to be spending more money on these things (or anything).

Yet thanks to the pliability of government-issued fiat currency and central bankers trying to control the entirety of human economic activity for decades, the value of the dollar has kept going down – and prices of all kinds of things have kept going up... And wages haven't been keeping pace.

It's a similar story with residential real estate. Average home prices haven't dipped significantly (price movement will vary by regions and cities) even as houses have become their most unaffordable in years. The average 30-year mortgage rate is now above 7% and at a 30-year high, while it was below 3% just two years ago.

As we've said many times before, home prices are holding up because there's not enough supply to meet demand. This is a long-term structural trend. So is the fact that people still want to live in houses even if the monthly interest cost on a $400,000 home today is about $1,000 more than it was two years ago, according to Freddie Mac.

As Stansberry Research senior analyst Brett Eversole wrote in the latest issue of True Wealth Real Estate, published last week...

These are all more symptoms of the ongoing American housing shortage.

Plus, now that the mortgage rate is trending higher, folks are scrambling to lock in today's rates "just in case" they go higher from here. And that surge in demand is putting upward pressure on home prices.

And that's the influence of inflation for you.

Resilience doesn't feel like the right word to describe this situation...

Reluctant acceptance, or resignation, is more like it.

After all, we're talking about the same group of American consumers that continues to pile up a record amount of credit-card debt, now exceeding $1 trillion for the first time ever.

U.S. credit-card balances rose by $45 billion in the second quarter of 2023 alone, according to the New York Federal Reserve's latest quarterly household debt and credit report.

That's not resilience... unless you take pride in racking up debt. It's just doing what's necessary when the cost of living is so high and, knowingly or not, dealing with the effects of trillions of dollars of pandemic-related stimulus.

In any case, the latest data from the U.S. Commerce Department shows Americans are still spending more money on retail goods. Sales rose 0.7% in July and in nine of the 13 retail categories, including sporting goods, clothing, and restaurants and bars.

As Kevin wrote in the NewsWire today...

The data reveals that American households, supported by a strong labor market and rising wages, are finding ways to weather current economic conditions. However, while consumers are starting to regain their purchasing power, the resumption of student loan payments and Americans' little savings still paint a cloudy picture.

Stay tuned.

Joel Litman is back...

Moving on and closing things out today, we have an important update and opportunity to share via our colleague Joel Litman, founder of our corporate affiliate Altimetry.

For those who might not know Joel, he's a world-renowned finance professor and accountant who has made several popular appearances at our annual Stansberry Research conferences. (He'll be there again at this year's event in Las Vegas. For more information on the event, click here.)

Over the years, Joel has developed a form of "forensic analysis" that neither Wall Street firms nor the U.S. government have been able to duplicate. Often, firms or agencies call on Joel to expose what they can't see...

The FBI once hired him to develop a way to see which CEOs mean what they say during their earnings calls... and which ones are lying. And we were pleased to become associated with Joel a few years ago when he decided to bring his expertise to the public, too.

It seems like not that long ago...

... but it was early last winter when Joel shared what proved to be a prescient message that we passed along here in the Digest. As we shared on December 1, 2022, shortly after Joel went public with this prediction...

Joel is sharing the names of three sectors that his systems say will likely crash in 2023... and three other sectors that are best positioned to soar.

It's that kind of time. The days of the bull market genius who could pick any stock and watch it grow are long gone.

And within those three sectors, Joel has picked the very best stocks he believes folks should own right now as part of a brand-new model portfolio.

In a free presentation back then, Joel shared two free picks, one that he was bullish on and another he said to avoid completely. The stock he recommended buying is already up roughly 70% this year – and the one he said not to touch is down almost 50%.

Today, Joel thinks his prediction of gains being isolated to specific sectors is only more relevant...

Specifically, he is alerting folks about a market event that has only happened twice in the past 15 years – and is now underway.

This event, Joel says, will trigger a massive opportunity in a select group of stocks before the end of the year. I can tell you that this opportunity is not in artificial intelligence, commodities, or anything else you may have heard of in the news.

This is the way Joel operates. A lot of what he talks about, you will not hear anywhere else...

Tune in to Joel's latest talk to hear all the details.

You'll get his updated game plan for the rest of 2023... and hear more about how he analyzes specific sectors for opportunities and for parts of the market to avoid. And just for tuning in, he will share two more free picks, just like he did last year.

That may be worth watching alone.

Click here to listen to his latest message now.

New 52-week highs (as of 8/15/23): Eli Lilly (LLY) and West Pharmaceutical Services (WST).

In today's mailbag, feedback on yesterday's Digest about China's slowing economy and what it might mean for your portfolio... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thanks Corey, I really enjoyed the concise implications of the slowdown in China. That was a very good email.

"As with Russia, it's not widely known in the U.S. by most average citizens just how much business the U.S. actually does and has done in the past with Russia and China. The U.S. imported a substantial amount of oil from Russia for many years as did Europe including natural gas. Even with the U.S. sanctions, Russia is still exporting plenty of oil putting countries such as India in the questionable 'where do you stand' position regarding the Ukraine invasion which is dragging on far too long and has become a major expense for the US government and for the NATO partners. War is unfortunately still an industry..." – Subscriber Rodger G.

"Thank you, good input, useful information.

"Most investors may not realize it, but China is as big an influence on economic conditions as [does] the U.S. So a Chinese Recession and a U.S. Recession have similar consequences (although not so much to in-country oriented businesses).

"For China, the largest impact is to the [Pacific rim] and Europe, their largest trading 'partners'. On the other hand, because the dollar is still the world's reserve currency, a U.S. Recession tends to historically affect everyone (or almost everyone).

"For the U.S. investor, because so much of U.S. trade is European oriented, a China Recession affects Europe quite significantly, which then affects the U.S. with a lag. Worse, as noted in the article, China's weakness strengthens the dollar, which constrains purchases of U.S. goods.

"This ultimately means that a China recession could trigger a U.S. pullback or even a Recession. Of course, that is a matter of degree and duration due to the 'lag factor' buffer and other real-world fundamentals and sovereign fiscal and monetary policies.

"Thank you. Good article. Keep them coming." – Stansberry Alliance member Bill B.

All the best,

Corey McLaughlin
Baltimore, Maryland
August 16, 2023