Investors Keep Market Sizzling
July 21st, 2023
Like a Texas heatwave, the Dow Jones Industrial Average continued its hot streak this week. The index has now risen for 10 consecutive days – its best daily winning streak since 2017. Better than expected Q2 earnings and resilience in consumer spending helped push the Dow higher. Although we’re still early in the earnings season, of the 77 companies in the S&P 500 that have reported earnings to date, 72.7% have topped analyst estimates. This compares favorably to the long-term average of 66%. Economically sensitive sectors such as consumer discretionary, industrials, and financials have, in particular, fared better than many expected coming into this quarter’s reports. In economic news, data showed consumers continued to open their wallets in June, sparking optimism for a 2H 2023 manufacturing rebound. Meanwhile, sales of existing homes were weighed upon by a lack of supply, and high prices sidelined many would-be homebuyers. For the week, the Dow Jones Industrial Average rallied 2.08%.
Retail Sales Spending Shifts from Services to Goods
Slowing inflation and a healthy jobs market kept consumers spending in June. Retail sales rose 0.20% to $689.5 billion, its third consecutive monthly increase. Interestingly, consumers shifted their spending from services to goods. Furniture, electronics, and online shopping all moved higher, offsetting a drop in grocery stores, gas stations, and sporting goods. Consumers tempered their experiential spending with bar and restaurant receipts generally flat during the month. Manufacturers’ expectation for a resurgence in goods demand seems likely as we head into the historically busy back to school and holiday shopping season. The National Retail Federation expects consumers to spend record amounts for both back-to-school and back-to-college shopping this year. Back-to-school spending is expected to rise to $41.5 billion, up from $36.9 billion last year and the previous high of $37.1 billion in 2021. Back-to-college spending is expected to be even hotter, forecasted to rise to $94 billion, about $20 billion more than last year’s record. Having feared that the combination of higher interest rates and inflation would significantly curtail spending, investors cheered the consumers’ resilience.
Existing Home Sales Slump on Tight Supply
Short supply combined with high prices and financing costs kept would be homebuyers on the sidelines in June. Sales fell -18.90% from the year ago period. That’s their slowest pace since 2009. On a month-to-month basis, sales were down -3.30%, running at a seasonally adjusted annualized rate of 4.16 million units. Inventory remained tight with just 1.08 million homes for sale, 13.60% less than June 2022. At the current sales pace, that represents a 3.1 month supply. By comparison, six to seven months is considered a healthy balance between supply and demand. Lawrence Yun, Chief Economist of the National Association of Realtors put it best, “There are simply not enough homes for sale.” A lack of homes for sale kept the pressure on prices. The median price of an existing home sold in June was $410,200, the second highest price ever recorded by Realtors. Unfortunately for homebuyers, the competition for homes will remain intense, particularly at the higher end of the market which is beginning to show signs of a recovery. The tight supply means that it will remain a sellers’ and new home builders’ market for the foreseeable future.
Final Thoughts
Spending data and better than expected corporate earnings from financial and consumer discretionary sectors extended the bullish optimism for the Dow Jones Industrial Average this week. The index has trailed the tech heavy S&P 500 year-to-date due to investor concerns over a potential recession in 2023 that would have more negatively impacted the economically sensitive Dow. Those companies having reported thus far, however, have shown consumers and businesses continuing to power through higher rates and inflation. Banks are among the most economically sensitive industries. They are also among the first to report during each earnings season, giving investors a sense of the broader economic backdrop impacting companies overall. The large banks have generally reported better than anticipated earnings, while noting an increase in client appetite for mergers and acquisitions, which bodes well for future economic momentum. Meanwhile, regional banks have seen their deposits stabilize, reassuring investors that conditions may have improved for that segment following a tumultuous spring. These earnings surprises coupled with a multitude of positive economic reports over the last several weeks has virtually eliminated the hard landing scenario for many investors. With the odds of a recession on the decline, traders have loaded up on their equity exposure in order to ride the momentum higher. The Federal Reserve remains the primary variable for the remainder of the year, however. Despite easing inflationary pressures, overall demand remains strong – bolstered by a strong job market and rising wages. The Fed has qualified its position as being data dependent, but it is clearly wary of pivoting too soon and reigniting inflation at a time when it looks to be winning the inflation battle. With the Fed set to announce next week, monetary policy will be center stage once again as investors react to any subtle changes in tone or wording that could give hints to the future rate path.
The Week Ahead
After skipping a rate hike in June, the Federal Reserve is set to resume lifting interest rates at next week’s FOMC meeting. Traders will be glued to the post-FOMC meeting conference for more color on the central bank’s monetary policy plans amid falling prices and a still healthy jobs market. The earnings season also shifts to the battle of the bots with Microsoft, Meta, and Google all set to report. In economic news, personal income and spending and durable goods orders round out the week’s releases.
Has Tipping Reached a Tipping Point?
“Tipflation” – the combination of the word “tip” and “inflation” – along with its close cousins “tip creep” and “tip fatigue” – are terms used to describe the widespread expansion of requests for consumers to leave both higher tips and to tip at more points of sale. While all of these terms lumped together generally describe the concept of tipflation, they have slightly different meanings. Tipflation is the rise in the tip amount expected, often now starting at 18% or 20% and going up to as high as 35% or more whereas older tip prompts may have started at around 10% with pre-populated tip options of up to 20%. Tip creep is the rise in tip requests appearing at more and more touch screen checkouts. Historically, consumers were accustomed to tipping at full-service restaurants, when taking a cab ride, and for services such as a haircut or a manicure. These days, more and more businesses are prompting customers to tip, including convenience store counters, fast food restaurants, home appliance repair professionals, plumbers, florists, stadiums, online retailers, and even the self-check-out lanes at grocery stores. Tip fatigue is the resulting response from consumers who are feeling the pressure to tip everywhere, especially in cases where it’s not typically warranted.
Employees who earn a minimum cash wage – also called a tipped minimum wage – rely on tips to boost their income which is comprised of the minimum hourly rate the employer pays plus tips from customers. A tipped employee is generally a service industry worker, but tipping has been spreading beyond those occupations. Consumers have reported being asked to tip when making online reservations, at automatic car washes, and on airport kiosks, to name a few. Almost 20% of Americans report giving tips for a broader array of services, and roughly half say they’ve left a gratuity when they typically wouldn’t have because a touchscreen payment system prompted them to do so. It’s attributed to the power of social pressure which is a real and measurable economic force, and the famous word for it is “nudging.” The touchscreen tablets that a lot of businesses use as their payment system have become ubiquitous and are driving these tip requests. At the end of a transaction, the screen nudges the customer to do something that may not feel like a choice even when it’s optional. It’s often an awkward moment for the customer and the cashier. Furthermore, the business can pre-set the suggested tip amounts, and they can also request dollar amounts instead of percentages. That’s how a consumer might get a suggestion to leave an extra $3 for a $4.50 pastry, which is nearly a 70% tip. The software can also make it hard to find the “no tip” option, making the tip feel less like a choice.
A Forbes survey found that 75% of people tip at least 11% more than usual – most likely because they are being asked. Restaurants that don’t offer wait service have seen a 16% rise in tip frequency according to payment processor Square. A recent cartoon in the New Yorker showed a customer at a touchscreen payment terminal in a coffee shop asking the barista, “which button lets me quickly clear the screen after I don’t leave a tip?” Customers are confused about when to tip, how much to tip, and who gets the tip. Legally, tips are supposed to go to the employees and not the business or the managers, but if there is a robot making your smoothie or you just purchased a snack from an airport kiosk, it’s not clear who would be getting the tip. By the way, payment processing companies such as Square get a cut of each transaction.
While customers have been complaining, businesses aren’t likely to stop the practice anytime soon. Tips are a way for businesses to attract more workers and control costs in an inflationary environment, and some businesses say their customers are happy to leave a tip and enjoy the convenience that tablet tipping offers. Lizzie Post, an etiquette expert from the Emily Post Institute and the author of several etiquette books said that if you are asked to tip for a service that doesn’t traditionally ask for tips, there’s nothing wrong with saying no.