In a recent edition of QV UPDATE (QV Investors Inc., March 24, 2017) writer Ryan Watson quotes an excerpt from the 1993 book Beating the Street, authored by Peter Lynch. In that book, Lynch relates that when looking for retail stocks he adopts a simple down-home strategy:
He drives to the local mall with his family, gives some pocket money to his children and watches where they spend it and what they spend it on. Says Lynch: ‘If you like the store, chances are you’ll love the stock.’ Eminently sensible? Absolutely.
Times have changed
But times have changed. As Watson notes, nowhere in Lynch’s book are terms like ‘mobile app’, ‘online’, or ‘Apple Pay’ mentioned. The digital revolution has transformed the retail landscape and, along with that, the criteria we have available to judge the value of a retail stock.
What should we make of what looks to be a stunning deceleration in US first quarter GDP? The market has clearly taken note, wiping out a good deal of its expectations for Fed rate hikes over the balance of 2017. And a lot of ink will be spilled in the week ahead as economists slice and dice the components that contributed to its softness. But the right interpretation might simply be that Q1 was no more meaningful as a sign of where the trend lies than what a cool month might say about global warming.
That’s because, like the weather, GDP reports are variable. Even if we leave out the heightened volatility associated with recessions, in the past two expansions, US quarterly growth has averaged 2.4%, with a standard deviation of 1.6%. Assuming these are normally distributed, that means that roughly a third of the time, a single quarter will be more than 1.6% above or below the mean.