Maybe we just have it all wrong. Maybe President Trump has so emphasized manufacturing and its importance to the U.S. economy, that we forgot that this nation is a nation based on consumption, not on industry, on sales, not on making things.
It's throwing us off track and this week, with all of these retail sales, especially those related to the home, is producing a lot more positive results in the stock market than people may realize.
Speaking of the President, I don't want to overlook the issues that the twin guilties, the guilty verdict for Paul Manafort and the plea of guilty for Michael Cohen. present for the President.
I indulged earlier about how the political news is hard to gauge when it comes to individual stocks - the JNJ theorem. But let me just say, having just come from a terrific seminar with Mark Chaikin of Chaikin money flow fame, we would be wrong to bet the house on what happens in politics because historically the market has shrugged off political turmoil. Chaikin measured the impact of the Kennedy assassination, the Nixon resignation, Iran Contra during the Reagan years, the Clinton impeachment, and found that all of these were never more than a short-term distraction. He also points out that the near-term downside for President Trump would be the likelihood of the Democrats taking back the house, and, to quote him "nothing much will get done in Washington after November and the stock market likes that."
So now let's revert to my thesis of what's wrong with so much prognostication right now. The President dominates the headlines through his appearances and his tweets and when he does it's all about international trade and bringing back manufacturing here. That's a worthy goal. We have lost a lot of manufacturing to overseas.
We are a 19 trillion dollar economy though and two-thirds of it is based on consumer spending. That means we spend way too much time worrying about our trading partners and way too little time talking about what our real economy is about, going to stores and shopping on line for goods and services. Yes, we should care about where cars are made and other countries should have no more tariffs on us than we have on them. You bet we should care about the Chinese stealing our intellectual property and demanding ridiculous joint ventures to steal our secrets and our profits. We sure do wish they bought more of what we make.
But to some degree all of this is a gigantic abstraction.
And that's what we have seen in this remarkable week when we have gotten reports after reports of amazing sales from American retailers, a much more important part of our economy than aluminum tariffs that actually help create at max a couple of thousand jobs. Steel's different; steel is a reviving industry. So I don't want to go down the path of being anti-tariff.
But we have now seen incredible numbers from Target (TGT) , from Lowe's (LOW) , from Urban Outfitters (URBN) , from Kohl's (KSS) and from TJX (TJX) to go with the stellar earnings from Walmart (WMT) and Home Depot (HD) .
Target's typical. Analysts were expecting about 3.9% comparable store sales. They came in at 6.5%. The company had incredibly strong traffic both in store and on line with same store sales trends accelerating in all given their core merchandising categories. As Cornell told listeners "While there are healthy increases across the board, comp growth in our home category was amazingly strong, up nearly ten percent. Hardlines also saw high single digit comp growth driven by strength in both toys and electronics."
All of this bounty isn't just limited to Target though. As CEO Brian Cornell pointed out "like others we're currently benefiting from a very strong consumer environment, perhaps the strongest I have seen in my career."
Now Cornell did address tariffs pointing out that he is "well aware" that things could escalate and that "we are concerned about tariffs because they would increase prices on everyday products for American families." He's not oblivious: "a prolonged deterioration in global trade relationships could damage economic growth and vitality in the United States."
But the real takeaway of all of these numbers from Target and just about every other retailer save J.C. Penney (JCP) is that the analysts who follow major parts of this economy have been dead wrong about their views of the consumer and of retail.
Whether it be a fear of Amazon (AMZN) , or a sense that the press about Trump has created an aura of negativity, or whether it be endless concerns about the Chinese, they have missed the boat, they are almost all playing catch-up, hence the smashing of consensus numbers.
I have some theories about why they are so wrong. Let me share them. First, as Home Depot's Carol Tome, the best CFO there is, told us, just because there's no real housing turnover doesn't meant there are issues in spending itself. The spend for refurbishing and renovation is off the charts, something that Marvin Ellison, in a brilliant introductory conference call now that he runs Lowe's made abundantly clear. The spend there is incredible.
No wonder Home Depot's stock is up seven from where it plummeted after the quarter. If you listen to Target or Walmart or Lowe's you know that the spend has surged on peoples' homes and apartments. I am sure when Best Buy (BBY) reports next week we will hear the same thing.
Second reason they missed? We were way into the Death Star just when Amazon was into web services and advertising.
I have total respect for Amazon. It is the largest position by far in my charitable trust which you can follow along by joining the Action Alerts PLUS club. But the fact is that Amazon's purchase of Whole Foods is beginning to look like a big fake out. They haven't disrupted the food industry, hence the huge romp in Kroger's (KR) stock. They haven't disrupted the discounter world as we can tell from Walmart, Target and Kohl's. Amazon hasn't dented the off-price business, which is why Burlington (BURL) , Ross (ROST) , Five Below (FIVE) and TJX have stocks that won't quit and just go higher and higher. Amazon really hasn't hurt CVS (CVS) as nearly as we thought and it is merging with Aetna (AET) anyway. Walgreen's (WBA) business is unimpaired, too. We know now that the do it yourself business, whether it be Costco (COST) or Home Depot or Lowe's or AutoZone (AZO) and Advance Auto Parts (AAP) , hasn't been zapped by the Death Star either.
In the face of a robust consumer who is benefiting from a torrid job market and lower taxes, Amazon can't crush all but the most hobbled of companies, like a Toys R Us or a Bon-Ton or Sears-Kmart (SHLD) and, perhaps ultimately a J.C. Penney. And unlike all the big retailers I have mentioned none of those companies had the balance sheet to compete as all the remaining store chains of rock-solid finances.
Finally, sorry, I have to go there: we have to talk millennials because they may be the most misunderstood cohort that simply isn't being factored in to retail sales.
We know from Victor Luis, the unbelievably good CEO of Tapestry (TPR) , that millennials love to spend to distinguish themselves and footwear and handbags allow millennials to express and individualize in a way that a fuddy duddy old analysts would never understand. We know from Target that millennials love to fix up their apartments, that's what is behind the incredible growth of their amazing small store format. We know from Strauss Zelnick, CEO of Take Two Interactive (TTWO) , that millennials just spend and spend on video games of all varieties. Do you know that one of the reasons we are such big fans of the stock of Nvidia (NVDA) , the chip maker, is that their brand new, just released Graphics Processing Unit makes video game images look exactly like that of the movies. There could be a tidal wave of new boxes and downloaded videos
These spending decisions matter. They are much bigger than what the President wants with China and our steel or even our technology. They are more determinant than Cohen/Manafort. And perhaps most important, they are the real narrative that helps you make money, not the Fed, not the ten year, not the inverted yield curve, not President XI, and not soybean and sock tariffs or corrupt Facebook (FB) pages. We have to focus on the forest of spend, not the trees of trade and then we can make the big money.