Reconciling the soggy consumer and an exuberant sharemarket

Tuesday’s diabolical reading that retail sales were down 2.7 per cent in December shocked even the pessimists, but on the same day, our sharemarket touched a record high.

Putting it into perspective, this is the biggest fall in monthly retail sales since the early months of the pandemic when many retailers were closed and some states were in lockdown.

And it explains why on Tuesday the retail industry notched up another casualty of the tough trading conditions – the 93-year-old vacuum chain Godfreys has collapsed and appointed PwC as voluntary administrators.

But investors are seeing through the retail gloom and the soft economy, and anticipating how cyclical companies will fare when inflation is a memory, interest rates fall and the recovery begins.

Cleanliness is no longer next to Godfreyness.

The good news is that at the same time we are feeling the pain of a cost-of-living squeeze, superannuation balances are being bolstered by strong gains in share prices. And house prices are also holding up well.

Cash-strapped as we are, most are getting richer.

And here is something else to add into the mix. Despite the sogginess of consumer spending, the share prices of discretionary retailers such as Myer, JB Hi-Fi, Harvey Norman and Super Retail Group have been on a tear since November.

JB Hi-Fi shares are up 27 per cent in three months, Myer has gained 35 per cent while Harvey Norman has risen 21 per cent over that time.

Those who find these gains counterintuitive may be forgiven, but the movements are perversely logical.

In the first instance, the Australian sharemarket is taking its direction from the US market, and its most important index the S&P 500 hit a record on Monday night our time.

The US market is finding its strength as it is anticipating a fall in interest rates – although the speed of the rate cuts remains a guessing game. But a conservative estimate is that there will be three US rate cuts this year.

Similarly, traders and economists are mostly of the view that the cycle of rate increases in Australia has likely come to an end.

The weaker-than-expected retail sales reading is bittersweet. On the one hand, it demonstrates the pain that consumers are feeling amid the cost-of-living crisis. On the other, it will further cement the likelihood that the Reserve Bank will keep rates on hold next week when it meets.

It may even have an impact on the timing of when the RBA may start to cut rates.

This holds the key to why shares in discretionary retailers are moving up.

Investors understand that the results for the six months to December will be pretty bad, and discretionary retailers’ shares had been sold off during 2022 and the start of 2023 while interest rates were rising.

But sharemarkets move in response to what is ahead, rather than what has already happened.

This explains why when Super Retail Group provided a market update last week saying sales in the December half rose a tepid 1 per cent on a like-for-like basis the share price didn’t fall – rather it spiked. At least Super Retail – the owner of Rebel, Supercheap Auto and BCF – managed to improve sales. Others in the discretionary space won’t fare that well.

And even though economists are predicting that retail sales will remain weak for a while and have not yet met their nadir, the sharemarket is looking through the gloom and focusing on the potential lift in sales as these cyclical stocks come out the other end.

To be fair, investors in retail companies were a little spooked on Tuesday when the ABS reported the value of monthly turnover for household goods in December fell 8.5 per cent, 5.7 per cent across clothing and footwear and 8.1 per cent in department stores. Only food retailing managed to eke out a small increase.

When results season starts next month we will receive more details on how retail profits are faring - but it probably won’t be pretty.

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