As the days gradually get shorter and the cool evening temperatures remind us that summer is coming to a close, the last quarter of 2017 is already in sight. In what has been referred to as the Teflon market, we now open the books of the historically treacherous months of September and October. The economic data has continued to confirm that the economy is grinding along and the markets for another month marched to the beat of optimism that better times are still ahead. Worries about retail, the consumer, market valuations, geopolitical risks, and the direction of the administration, dominated the headlines for much of the month.
With the dog days of summer unfortunately upon us, we are reminded once again it is time for the back-to-school shopping season. Although a sad time for children of all ages, it provides us some valuable insight on the overall strength or weakness of the consumer and health of the retail sector. Year after year it seems stores are rolling out back-to-school shopping ads earlier and earlier. This is an important time of year as the back-to-school shopping season is expected to make up almost 17% of total retail sales for 2017. Considering the winter holiday season in 2016 comprised 19.5% of total retail sales in the past year, it is apparent that the back to school season is primetime for retailers. Sales are expected to grow more than 10% over 2016 to $83.6 billion, according to the National Retail Federation’s annual survey conducted by Prosper Insights & Analytics. This is projected to be the second-biggest haul for retailers after 2012’s all-time high of $83.8 billion.
Electronics are traditionally responsible for a large portion of the family budget this time of year, but 2017 marks a departure for who is using the gadgets. Almost half of parents for middle schoolers said they were going to buy a laptop in 2017 for their own personal use. In all, 63% of U.S. shoppers who plan to do some back-to-school shopping expect to buy technology or technology accessories. But apparel, footwear and classic school supplies that are the traditional stars of back-to-school, still make up the lion share of sales revenue and are expected to get another bump up this year.
Where they are spending or planning to spend, has changed little since 2016. According to the CTA report, 88% of back-to-school shoppers plan to shop at a physical mass-merchant store and 56% plan to shop at a physical office-supply store. Both these statistics are the same as last year, according to the survey. In 2017, roughly 44% of back-to-school shoppers plan to spend at an online retailer. This season will be vital for brick and mortar retailers. Although revenues in the industry are expected to rise, the Sears and JC Penny’s of the world need to capture their share of these revenues to maintain investor confidence that they are here to stay. Aside from looking at individual companies in the industry, the projections for the 2017 back-to-school season revenues indicate a strong economy and a confident consumer.
We earlier referred to our current market as a “Teflon market.” August was once again a testament to the resilience that investors have shown in light of a multitude of geopolitical risks, the internal strife of the Trump Administration, and the wrath of mother nature bearing down on the coast of Texas, leaving behind devastation of historic proportion. Early in the month, fear gripped the markets as tension intensified between the US and North Korea. Headlines of North Korea’s ability to strike the U.S. Mainland with an intercontinental ballistic missile and harsh language in response by the Trump Administration played out in real time in our markets. Although the volatility index, known as a “fear gauge,” spiked from highly suppressed levels that have lingered throughout the year, markets gave back only a small fraction of the gains for the year. As headlines turned to other events, the 23% upside move in volatility quickly abated and markets moved on to the next event of the month to focus on.
It would be impossible to cover the headlines of the month and not address the events in Charlottesville, Virginia. There is only one way to describe anything about this event or the fallout afterward: simply shocking. It is hard to watch the video clips of the streets of a US city and not be in disbelief. Looking at the hatred and divisiveness in the country today certainly makes it difficult to feel good about what we have become as a society today. For some, unfortunately, we have lost our ability to “agree to disagree.” The emotion and loss of life cannot be minimized, yet the markets do not see these events as changing the trajectory of the economy. They do, however, further challenge the focus of the administration and therefore raise more questions about the ability and timing of any legislative action.
As the conversation turns to tax reform and as we wait for more economic data and signals from the Federal Reserve, markets will continue to look for direction as we head into the challenges of September and October. For many in Texas, the need for just basic necessities will unfortunately be the focus in the weeks to come. Mother nature reminds us every now and then that life as we know it is in a fragile balance. Our thoughts and prayers go to those who have been effected by this horrific storm.