Market strategist: 'We need to take a breath' and realize that the U.S. economy is showing strength

Scott Helfstein, ProShares Executive Director of Thematic Investing, joins Yahoo Finance Live to examine the positive takeaways from November's retail sales data despite not outpacing estimates amid inflation and e-commerce's apparent dominance.

Video transcript

ZACK GUZMAN: I want to bring on another guest here to expand on what it all means for markets as we are starting to see some of those numbers soften. And of course, what we might hear from the Fed could up-end all of that. For more on it, I want to bring on Scott Helfstein here, ProShares Executive Director of Thematic Investing joins us.

And Scott, I mean, when we're looking at it-- we were lamenting it last hour, not an easy spot to be in when you're trying to factor in all the omicron data and what it means for the recovery. But when you're kind of looking at the latest numbers here and retail sales coming in softer, slow down from 1.8% to just 0.3%, how do you put that into your model? Where we're at in this recovery and what it means for what the Fed has to do.

We're not sure if you're muted on your end or our end here.

SCOTT HELFSTEIN: I think we're good to go now. Thanks Zack for having me and apologize for the technical hiccup there. But I think people need to take a step back. And while the 0.3% was below the 0.8%, that's on a month over month expectation. On a 12 month basis, so we look year over year, retail sales growth were up 18%. And obviously there are some COVID related swings in there as we saw foot traffic, for example, fall off last year, online lift.

But if we take out COVID and we compare pre-covid 2019 to today there's 22% retail growth over two years. It's 11% annually and that is well above the 4% average retail sales gain. So I think we need to really take a deep breath because the numbers that we're getting out of the economy, and I think this retail sales number included, continue to show strength. And whether it's high frequency data like the Empire Manufacturing or whether it's the wage increases there are still a lot of reasons to remain optimistic.

AKIKO FUJITA: Scott there's no question the improvements have been there, it's just a really dramatic change from October when it was well over 1% in terms of the growth. At the time we were talking about potential pull forward because so many people are shopping early for the holiday season. How much of the moderated growth that we saw this morning do you point to the pull forward? How much of it is about COVID or price pressures?

SCOTT HELFSTEIN: So I think there are a mixture of things. I think the supply chain disruption did pull people towards an October date. They were worried about delivery, they were worried about inventory, but as we've seen inventories have held up. They were a lot higher than they were last year. Certainly the onset of omicron over the course of the last few weeks, perhaps has caused a little bit of a scare. Nonetheless consumer sentiment remains robust. So I think there are a number of factors. We also, quite frankly, saw a lot of front running on Black Friday sales.

And as you pointed out, in advance really going back to October and then through November, there was a lot of positioning in the retail sector to try and gain the consumer dollar. So while we haven't seen the gains quite as strong, if we just again look at the aggregate numbers, we got $640 billion of sales this November compared to $523 billion just two years ago. So I don't think we should take that away as a weakness. I think that there are a number of factors that are weighing on consumers.

I also think for the first time in a long time consumers are really grappling with inflation. Ever since the financial crisis, if we go back a decade, consumer sentiment has actually moved higher when there's been increases in inflation. And I think a lot of that is because those increases were modest and they coincided with better economic growth. Whereas if we go back to the 1970s and we look from a longer period from 1970 to 2011, consumer sentiment goes down when inflation goes up. So I think for a lot of Americans we're in a new environment, both from a spending and an investment perspective.

ZACK GUZMAN: I guess when you still look at like the longer run inflation expectations, nothing wildly out of the norm, in terms of investors and consumers still thinking that some of this will be-- I don't want to use the word transitory because we're not using that anymore, but will not last as long as maybe some people had feared. When you look at maybe how it's impacting, we want to stick with thematic investing, how it's impacting retail, obviously a huge shift to e-commerce earlier in the pandemic. Now we're seeing more retailers kind of stress the impacts of inflation on margins. You look at Walmart and Target, I know you mentioned those in your notes, what do you make of that persisting into 2022 and beyond, this shift between brick and mortar and e-commerce and whether or not e-commerce can still mainly win?

SCOTT HELFSTEIN: It's been a really wild ride the last two years. At the outset of the pandemic with stay at home and store closures people had no choice but to turn online. And they turned online for things they never bought before like clothes and grocery. We also saw demographics that had not been big online shoppers for example, Baby Boomers began to turn online. And then of course, we get the introduction of the vaccine, stores begin to reopen. And there's been a wild shift towards brick and mortar this year, particularly with regards to market sentiment. And so we've seen investors sort of flee the e-commerce space, move into brick and mortar, we actually think it's become kind of a perfect storm of the combination of reopening, some fears about inflation, some concerns about China, that present a really great opportunity.

Because on a long term basis, e-commerce has generally been growing at about twice the rate of the rest of the retail market. And as this reopening trade kind of plays itself out and reaches an extreme, which is where we think it is, focus can really come back to where that long term secular growth is. So right now you've got e-commerce selling about 30% off of its peak forward price earnings valuation. So selling at a little bit of a discount and yet the expectations for earnings on those digital native sellers are still around 14% or double the S&P. And these are the companies that have dynamic pricing models that can flex to what the inflation environment is.

It's very hard for a Walmart and a Target who, for example, blamed inflation for some of their margin pressures in the most recent quarter. It's very hard for them to send people through the stores and change the prices every five minutes. However, the digital natives, the online players, can have much more flexible pricing systems that can adapt to an inflationary environment, whether it's permanent, whether it's transitory. And they also have lower fixed costs. So we think that there is a lot of good things ahead for the e-commerce space.

AKIKO FUJITA: Yeah that's an interesting point there are differentiation between the digital natives and those who are more in a hybrid environment. Scott Helfstein, ProShares executive director of thematic investing, good to talk to you today.