The Retail Effect

Since the 90s, retail stock trading and retail sales have coexisted. Gains from stock trading are being spent, which is driving the economy and the broader market, enticing more trading by retail investors.

This positive feedback loop has been strengthened by “dip-buying phenomena,” which is double-edged; younger generations that embrace risk as part of a core strategy because they believe markets cannot go down, and older generations who use dips to leap to retirement.

As a result, leverage has risen to extreme highs: younger generations express optimism about an unbeatable market through naked calls, while older generations allocate IRAs to leveraged index ETFs. The picture becomes scary, but also one of economic necessity; without leveraged stock gains, retail spending would be flat or negative, caused by tariffs.

Importantly, as those caused an inventory pile up, amassed imports from countries using duty-free loopholes, as the WSJ reports, retail spending could be in for a surge, which is an indicator for the potential of accelerated upside in stocks.

Figure 1: Retail 3x leveraged ETFs assets and call option volumes ($, millions)

Source: Robinhood, Schwab, Interactive Brokers

Since February, imports have surged, driving up sales to inventory ratios alongside same-store retail sales to online ratios.

While these can be noisy, the massive run in the stock market since it was time to buy on April 8^th, credit card spending has been unrelenting, crossing the $4.5 trillion mark as the clearest sign of exacerbation of financial leverage on top of FINRA’s margin debt to buy stocks, which has surpassed $1 trillion.

Such leveraging is conducive for the retail same-store ratio to jump, albeit it is not the same effect as seen in 2021 (Figure 2).

Nonetheless, the retail effect, which is different from the wealth effect because it is short-term spending based on short-term gains, will dominate the economy going into the fall, potentially accentuating the positive feedback loop between spending and stock trading.

Figure 2: Retail Sales to Inventory ratio, and same stores ratio

Source: National Retail Federation, Census, BEA

Retail sales are a nominal value, which means that tariff impact is directly measured in dollar terms. As companies apply “import substitution” to lower effective tariff rates, and indeed, according to a Barclays study, those fell from 12% to 9%, tariff pass-through to consumers has been delayed by several months, albeit that is set to change as exemptions expire.

Yet, what has a more profound impact on retail is food. As everyone likely experiences, the average daily annualized price of basic food has risen to 3-3.9% according to the latest reading of CPI food at home and food away from home. But yesterday’s PPI report (page 14) showed that “final demand foods” and “consumer food crudes” were running at 4.9 to 14.2 annualized.

While there is attention to how much flattery there may be in the Trump-Putin summit, the more important outcome is that a standing truce that becomes a permanent peace and ends the war in Ukraine, is that the price of food oils, which the US doesn’t produce enough (like rare earths) and must import from Russia and Ukraine and has surged to more than $5 billion annually, is finally going to normalize.

This is a key for (headline) CPI and PPI as food oils, necessary to produce and consume food, have been a structural contributor to sticky inflation since 2022. The UN food oils price index has been rising, along with palm oil futures. A break in food oil prices would be a significant relief at the retail level (Figure 3).

Figure 3: Food oil prices

Source: United Nations, MCX Exchange

Thus, with retail sales estimated at 0.6% m/m advance and 0.4% control group (feeds into GDP), stock market gains driving PPI will likely also drive retail sales, and thereby retail trading volumes, as seen from the explosion in brokerage platform volumes and retail ETFs (Figure 4). The retail positive feedback loop, critical to the level of financial conditions, could set up markets for a stage of acceleration.

Figure 4: Retail trading volumes

Source: NYSE, Robinhood, Interactive Brokers, Schwab