By Susanna Gibbons, CFA
Managing Director, Carlson Funds Enterprise
Carlson School of Management, University of Minnesota
Finishing my 15th week of WFH (Work From Home), I feel an urge to reach beyond the bounds of my new home office, just to see if anyone is still out there. Friday afternoon in the laundry room is a uniquely great setting for thinking about the world in a relatively unbound way. I am not exactly unplugged, but I am somewhat insulated from the chattering of the Street, so I thought I might start chattering a bit myself.
Like many of you, I have been amazed at the resurgence of equities since March (past few days notwithstanding). The market is placing a significantly higher probability on a V-shaped recovery than I am, so I have been trying to unpack the data here and there, since I don’t really want to be right. And the retail sales number from June 16 is the perfect place to start, since it was a surprisingly strong number – up an eye-catching 17.7% compared to expectations of +8.4%. Yes, I am aware that if you are down 14.7% and then up 17.7% you are right back where you started. The number was still a really positive sign and clearly leaned in favor of a solid v-shaped recovery.
I am also aware that Autos were by far the largest part of that number, followed by Furniture. I know we don’t go out buying cars every day, or furniture, and that it was heavily promotional, but it was still a positive sign. Americans have not forgotten how to spend money! The V-shaped recovery might be within our grasp.
There is also one little tiny category that was not only up strongly in percentage terms, but actually exceeded spending from 2019: Sporting Goods, Hobby, Book, and Music Stores. This category of retail spending sounds like a boomer throwback category if there ever was one….I mean, music stores? It’s one of the few categories of retail sales that has seen virtually no growth since 2008. And yet there it was, popping up out of nowhere. Naturally, I had to talk to someone younger to figure this one out. Was everyone really buying CDs from newly re-opened record stores?
Nope. According to my sources, people-younger-than-I have realized that going to a gym for a group fitness class might not be fun for a long time. In what I am labeling the Peloton Effect, it seems they have swapped their gym memberships for Pelotons, NordicTracks, Mirrors, Bowflexes, bikes, and in what surely is an act of sheer desperation, golf clubs. I asked my source, who was recently furloughed, how it made any sense at all to purchase a $2,000 piece of equipment at this time. Apparently, this particular household had been spending $250 a month on yoga memberships, $150 a month on studio cycling, and another $50 on an ordinary gym. Those have all been canceled, and they are now left with $70 a month to finance the Peloton for the next two-plus years, and $30 a month to join their online classes –zoom-for-bikes. (They also had to get a new couch to make room for the bike, so maybe that helps explain the furniture sales numbers.) Significant monthly savings.
The important point here is that large numbers of people are shifting their behavior in dramatic ways. They are swapping monthly studio payments (bad news for commercial real estate owners) in favor of equipment ownership. To me, that minimizes to some degree the bounce we saw in retail sales. Shoppers are back, but their behavior has changed, and it would be a mistake to extrapolate sales growth right now because we are caught in the middle of this seismic shift. We are seeing this shift in other ways, too. Nobody needs nice pants anymore, we only need one nice jacket, we don’t go to the dry cleaners, we don’t get our hair cut. We do need a new router or laptop. Retail businesses may be re-opening, but many of us are re-thinking how we engage with the world, and how we allocate our resources. There is some up-front capital cost to the shift, but that short-term pop might be the front end of a long-term down-shift in overall spending.
Or not. The reason my laundry room looks so nice right now is because I could finally renovate after getting rid of the 25-year-old Heavy Bag that was part of our mid-90’s boxing-for-fitness routine. It’s been on the floor for most of its existence. I’m not going to get sucked down that hole again. Plus, it’s 12 weeks right now to get a Peloton.