Inflation – we feel like it is the only thing on the mind of the country for the past few months. Let’s take a minute to dive into one corner of the inflation story: retail inventories. Inventories were picked over during the pandemic. This led to retailers having to rebuild their inventories, and they have done quite a good job of restocking their shelves. Inventories have increased by 10.5% over pre-pandemic levels since May of 2021 (see the chart directly below). This is partly due to a shift in consumer spending patterns but also due to a desire by retailers to not be caught shorthanded again after their pandemic woes.
The scale of the increase in inventories is even more impressive when you overlay inventory growth with sales. Early in the pandemic, sales plummeted, only to break to a new much higher trendline in a matter of months. Inventories began to rebound when sales took off. Looking at the red line in the chart below, during the first half of 2021 we can see the significant spike in retail sales – and this is inflation-adjusted data. Consumers created a new trendline higher, and yet inventories were not able to increase at the same pace during that period. Since the second half of 2021, retailers have been ordering and adding to inventories at a significant clip. In some sense, they had to do this just to placate a public that was complaining constantly about shortages.
This cycle is coming to an end. We have seen several big-box retailers come out and say that they are now overstocked – for example, Target and Walmart. We are not surprised by these announcements. Just take a moment next time you are in the supermarket. Looking at the lower shelves, you will see some empty spaces for sure. But an increase in product has been added elsewhere in the store, often on higher shelves, that was not there previously. This area is chock-a-block full of product.
Both Walmart and Target have said that they will be cutting down on inventories. That will most likely be deflationary on some prices. I don’t know about you, but I am starting to get sale advertisements in my email inbox and banner ads in my web browser again. These seemed to be absent for most of the past 2 years. This is another sign that retailers are full of product and cutting back on orders.
Past performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
Model Updates
On Monday, June 27, the Global ETF Opportunity model underwent its monthly relative strength rotation. The model moved its emerging markets equity exposure from Latin America to China and increased its allocation to short-duration fixed-income.
On Friday, July 1st, the Equity Growth and Emerging Growth Companies stock models both added a new position in the electronic gaming industry. The two models also trimmed some under-performing holdings. The Alternative Asset Opportunity model eliminated its cryptocurrency position and increased its allocation to inflation-protected fixed income and managed futures.
There were no other trades in EWM Investment Solutions models during the week ending on July 2, 2022. All major equity market sectors are currently in a long-term unfavorable trend, and Asset Allocation models remain at their lowest possible tactical equity exposures, with domestic stocks favored over international shares.
Quote of the Week
Over multiple years, a significant number of EY [ Ernst & Young] audit professionals cheated on these exams by using answer keys and sharing them with their colleagues. From 2017 to 2021, 49 EY audit professionals sent and/or received answer keys to CPA ethics exams.
An excerpt from a Securities and Exchange Commission (SEC) enforcement action filed last week which fined the Big Four accounting firm Ernst & Young $100 million for allowing rampant cheating during the administration of the Certified Public Accountant (CPA) ethics exam. It is unclear whether “Is it ok to cheat on this exam?” was one of the exam questions.
On A Lighter Note
The promotion around the latest Jurassic World movie earlier this month made this writer realize that one of the surest signs that you are no longer a kid isn’t some big life-changing event like graduating high school or getting your first job, no – it’s when you can’t remember the last time someone asked you about your favorite dinosaur.
Nowadays, all casual conversations with strangers on the street seem to start off with platitudes like “How about that market?” or “Some weather we’re having, huh?” and generally devolve from there. But there was a time, several decades ago, when every new person you met on the playground would go right to the important issues of the day and demand to know, “What’s your favorite dinosaur?” And boy did I have an answer ready to deliver – the sturdy stegosaurus.
The stegosaurus was a herbivore, so he wasn’t looking for trouble, but you knew that when things went down he could send any prehistoric opponent to frown town. With plates of armor on his back, and sharp sticks on his tail, he could handle himself in any dinosaur dustup. And although some scientists claim his ping pong ball-sized brain shows that the stegosaurus was history’s dumbest dinosaur, he did live for over 10 million years – twice as long as that Hollywood-hype job the velociraptor. An argument as simple as 123 Q.E.D.
The Stegosaurus – The World’s Coolest Dinosaur
Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities. EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email. For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor.
Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on June 24, 2022 to closing price on July 1, 2022
1 Month = closing price on June 1, 2022 to closing price on July 1, 2022
3 Month = closing price on April 1, 2022 to closing price on July 1, 2022
YTD = closing price on December 31, 2021 to closing price on July 1, 2022
All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.
Copyright © 2022 Executive Wealth Management. All rights reserved.