Jul 20, 2024 | Retail Sales, Oil Demand, Japan's Pension Fund and Spousal Social Security

Retail sales beats expectations but shows consumer is still softening.

June retail sales came in flat compared to the previous month, this topped the expectation for a 0.4% decline. Compared to last June, retail sales were up 2.3%. Areas of strength included non-store retailers (+8.9%), food services and drinking places (+4.4%), clothing and clothing accessories stores (+4.3%), and electronics and appliance stores (+2.7%). Both furniture and home furnishing stores (-4.0%) and building material and garden equipment and supplies dealers (0.9%) were done when looking year over year, but they have perhaps started to turn the corner as they both showed month over month gains. Gasoline stations were also a negative weight as it was down 3.0% compared to last month and 0.4% compared to last year. Overall, I believe this is a strong report that shows an economy that is slowing but remains in a healthy place. With this news and other comments from Fed chair Powell markets have now priced in a 100% chance of at least one rate cut by the September meeting. 

 

Will oil demand increase or decrease in years to come?

I have been concerned about oil consumption and investing in oil related companies based on the increase in electric and hybrid vehicles. Unfortunately, there’s not much help in predicting oil demand from the experts. British petroleum, also known as BP, expects oil demand will plateau by 2025. They believe the subsequent decline will depend on how aggressive countries get with carbon omissions. BP believes by 2050 oil demand could drop down to 25 million to 30 million barrels a day if countries get serious about a “net zero” goal. This would be a major decline from today’s level of about 102 million barrels a day. But there’s others who disagree such as OPEC which sees demand growing by 4.1 million barrels a day from 2023 to 2025 and continuing to rise at least through 2045. The Paris-based International Energy Agency forecasts a peak in 2029 and the US Energy Information Administration is looking for peak between 2030 and 2040. It also looks like Warren Buffett does not believe a peak is coming soon as he has been investing heavily into Occidental Petroleum and has a sizeable stake in Chevron. With all the uncertainty, I believe if an investor is going to invest in an energy company, it should be a well-diversified. 

 

Japan’s $1.5 trillion pension fund could be a black Swan for our stock market.

Japan has grown their pension fund to $1.5 trillion over the years and has continued to increase the amount of money they invest in the US. As of March 31st, about 50% of the fund was held in foreign stocks and bonds, most of which was in the United States. The problem they have is their currency, the yen vs the dollar has fallen to levels not seen since President Reagan was in office. The investments in foreign countries have led to some criticism as some say it amounts to a vote of no confidence by the Japanese government in its own currency. It is unknown what US equities they hold, but the fund was up 23% in its most recent fiscal year. My concerns are what if they want to reduce their exposure to US equities and bonds to 30%? That would be a reduction of around $300 billion. What if they hold in their pension the high-flying technology companies? How would those stocks perform if the fund sold $100 to maybe $200 billion worth of stock? No one knows for sure, but with that 23% gain there is a high likelihood that they had a portion perhaps a good portion of the investments in the US technology companies. 

 

A Major Mistake with Spousal Social Security

When collecting Social Security on your own work history, you may collect between the ages of 62 and 70. Every month you wait, your benefit amount increases. In cases where one spouse did not work, or had a very limited earnings history, that spouse may qualify for a larger spousal benefit from Social Security. The maximum spousal benefit is one half of the higher earning spouse’s full retirement age benefit amount, and the lower earning spouse would need to collect at their own full retirement age to receive it. If this half is more than what they would receive from their own earnings history, they will receive the larger spousal benefit, not both. If they collect before their full retirement age, they will receive a reduced amount. Also, the higher earning spouse must be collecting for the lower earning spouse to be able to collect a spousal benefit. Many people have the idea of deferring their Social Security until age 70 so they receive the highest possible monthly amount. This strategy may not be the best decision normally, and it can be even more problematic when a spousal benefit applies. I met with some people this week who had this idea. One spouse worked and the other did not, so a spousal benefit was definitely going to be applicable. The problem is, a spousal benefit does not get any larger beyond full retirement age, which in this case was age 66 and 10 months for both of them. They were both the same age, so if they had waited to collect until 70, the lower earning spouse would be deferring 38 months (from 66 and 10 months until 70) for no additional benefit. In this case the spousal benefit was about $1,900 per month so whether she collects at 66 and 10 months or waits until 70, she would still receive only $1,900. This mistake would have cost them over $70,000 in missed Social Security benefits. Fortunately, they had not reached their full retirement age yet and the working spouse had not retired, so they had not lost anything yet. If you will be receiving a spousal benefit from Social Security it is almost never helpful to defer beyond your full retirement age, which is usually around age 67. 

 

Companies Discussed: CrowdStrike (CRWD), Amazon (AMZN) and PepsiCo (PEP)