Spend, Spend, and Ukraine

Higher inflation has dampened consumer confidence, but so far, there’s little to suggest consumers are avoiding retailers. Last month retail sales soared 3.8%, the biggest increase since last March. Note that these numbers are seasonally adjusted, so we don’t see wild swings during and after the holidays. It allows for more accurate month-to month (apples to apples) comparisons. But they are not adjusted for inflation.

What stands out? Stimulus checks last year fueled an enormous increase in spending when the cash landed in checking accounts. It drove economic activity. On the flip side, strong demand for goods amid supply problems also exacerbated inflation.

Anything above 1% would be strong. October’s 1.8% rise was probably due to early holiday shopping, as some folks fretted that supply issues could leave them empty-handed.

Here is another interesting graphic, which illustrates the change in retail sales before and after adjusting for inflation.

Before adjusting for inflation, retail sales are at a record high. After taking inflation into account, sales are just below the April peak. You’ll note that the sharp divergence started in April, when the Consumer Price Index (CPI) began to surge.

Last week, however, most investors continued to focus on the brewing conflict in Asia.

Outcomes are never certain. But when uncertainty rises and the range of potentially negative outcomes increases, short-term investors usually take a more cautious approach.

We’ve seen that in recent days. For starters, what might happen (or not happen) to oil prices and the European economy if Russian tanks roll into Ukraine?

If that occurs and we sincerely hope it does not, impact on consumer psychology would probably play the biggest economic role at home.

Following the surprise attack on Pearl Harbor, the Dow lost 6% in two days—DJIA data from the St. Louis Federal Reserve. An invasion today wouldn’t come as a surprise.

The Dow lost another 15% by the end of April 1942 but was back to even one year after the attack. By the time the war ended, the Dow had added over 40% from its level just prior to Pearl Harbor.

I wouldn’t attempt to trace out a path for the market if an invasion occurs. Historically, geopolitical tremors and conflicts usually haven’t had much effect on the U.S. economy and U.S. corporate profits. The real toll has been on those caught in the conflict.