Same Store Sales Growth Jumps

Redbook same store sales growth is indicating there was an upturn in spending in the 2^nd half of December which is interesting because most indicators have been weak. You’d think there was more weakness in the end of December because the virus spread as the month progressed. The vaccines have only started going out in the past couple of weeks. 

Some people are worried that the vaccines will take years to go out because of the initial slowness. Of course, it will take a few months for them to go out. We all want it to happen as quickly as possible. Some still think the rate will increase in January even though it has started slowly. Remember, Pfizer had a delay at the start.

The stimulus is also important. States will start giving out unemployment benefits immediately. The 14 million people who could have lost their benefits won’t. 20 million people are getting an extra $300 per week. It doesn’t look like Mitch McConnell wants there to be a vote on a $2,000 stimulus. 

It would be a tough vote for Republicans because it is divisive. The GOP senators up for reelection in Georgia both support the stimulus. The latest polls have the races extremely tight. Most of us have no idea who will win.

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Redbook same store sales growth rose from 6.5% to 8.9% in the week of December 26^th. Remember, last week it was said that just one good week was meaningless. Now that we have had 2 great weeks, it’s reasonable to say based on this metric the consumer is doing better. 

As you can see from the chart above, department stores have had a sharp recovery in sales growth since August. At about -20%, sales growth is the best since March. Departments stores have been in a secular tailspin for years. It will be interesting to see what growth normalizes at. This recession encouraged industry disruption. Maybe, the industry will come out of this in a better place as the strongest firms with the best merchandise survived.

Economic Activity Stalls

In the past couple of weeks, some investors have been saying the economy is in a slowdown, but it’s not as bad as it was in the spring. Some still think December and January will be better than March through May. However, the chart below shows activity in most advanced economies crashed over the Christmas holiday. Maybe people stayed home over the holidays after all.

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You can see there was a small spike before the holidays which must have been spending in preparation for the holiday. On the actual day, people largely stayed home and didn’t spend money. It’s possible activity is going to stay extremely depressed, but it will likely bounce back moderately. 

Obviously, the virus is the reason it is down at all, but the holiday was a temporary blip that sent it near zero. Some countries’ data is worse than their trough in early April.

How Will The Post-COVID-19 World Look?

Everyone wants to know where housing and commercial real estate are going once the virus is gone. We must consider this because the virus will be gone at some point soon. Did it cause the entire economy to shift or will things go back to normal? 

As you can see from the chart below, a Nuveen report shows the share of office real estate in US portfolios will fall from 35% to 10% from 2020 to 2030. Office work isn't likely going away because in person connections will lead to more promotions and better projects. When colleagues see the workers who go to the office getting certain perks, most will come back to work on premise too.

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That being said, most don’t disagree with real estate investments growing in data centers, cell towers, and other tech properties. There will also be more investment in healthcare due to the aging of boomers. Retail is projected to fall which makes sense as online shopping takes share over brick and mortar stores.

Housing Market Getting More Expensive

To be clear, shelter inflation in the CPI report is based on rent prices. Rent inflation has been low because evictions have been banned due to the recession. However, single-family house prices have increased sharply. It’s not in CPI, but it’s in real life. According to the 20 city Case Shiller house price index, the monthly adjusted growth rate was 1.6% in October which was up from 1.4% and destroyed the consensus for 0.7%.

On a yearly basis, the growth rate was the highest since mid-2014 as you can see from the chart below. Growth rose from 6.6% to 7.95% which beat estimates for 6.9%. The easy comps certainly boosted growth, but the main catalyst is the lack of supply and low rates. Also, people in their upper 20s and lower 30s are buying their first house. Some people are moving from city apartments into single-family homes because of the virus.

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This virus was a once in a generation event that shouldn’t change long term trends towards people living in cities. That being said, there will be a modest increase in people working from home. Meaning, we're not predicting all these people who left cities will move back. That's just saying once the pandemic is over, the fleeing of cities will end. Rich people, who have multiple houses, will come back to the city, particularly NYC.

Conclusion

Redbook same store sales growth spiked in the 2^nd half of December. Economic activity plummeted during Christmas. Nuveen projects investors will invest less in retail and office real estate in the next 10 years. Housing prices are jumping quickly because of tight supply and low interest rates. 

Investors don’t anticipate yearly growth getting to the double digits like in 2014. We probably will see higher growth in the next 2-3 months before it stabilizes as more supply comes online. The big unknown is interest rates. We can expect a modest increase in rates next year as the 10-year yield rises to 1.5%. The 10-year yield just missed my target of 1% this month.