U.S. retail sales have managed to bounce back from the pandemic-driven recession of 2020 faster than they did during the 2008 recession. Anthony Okolie speaks with Damian Fernandes, Portfolio Manager, TD Asset Management, about what that means for corporate earnings.
DAMIAN FERNANDES: Hey, Anthony. Thanks for inviting me on here.
You know, it's funny. You talk about peak growth. Of course, we're going to be at peak growth, right? Peak earnings growth. Doesn't mean peak earnings. What I mean by that is that, when you think about last year, Q2 2020, the whole world was in shutdown, the whole world was quarantined. We weren't-- activity came to a standstill. So of course, Q2 this year, when you've had reopenings, when you've had consumer demand, all of that stuff, you are going to see peak earnings growth.
It doesn't mean that we're going to be at peak earnings. And I thought a good point of reference to help really bring that to life was the chart you're showing right there. It shows how US retail sales looked in 2008. So if you start out at 100 in 2008, because of the great financial crisis, because of tremendous job losses, because of a constrained consumer, because businesses were stretched, it took three years, till 2011, before the consumer was able to achieve the same level of retail sales as they did in 2008.
Contrast that where we are today, right? This recession last year, the pandemic-induced recession, has a very different feel and breadth. It took basically six months. So last year, if you looked at retail sales in June 2020, they were already higher than they were in December 2019. So of course, you had a sharp drop as consumption collapsed because of quarantine measures. But then, you're an equally sharp, you see that V, an equally sharp recovery ratcheting up of retail sales. And it's continued.
It's continued because for a few reasons, right? It's continued because household wealth is up $20 trillion before pre-pandemic. It's continued because the US consumer is in a much better position than they were in 2008. And that makes me optimistic that while yes, we are at peak earnings growth because of easy compares, we're not at peak earnings, which is what I think will ultimately drive the market.
ANTHONY OKOLIE: So Damian, what are the biggest risks to your earnings outlook going forward?
DAMIAN FERNANDES: You know what, Anthony? That's really important, right? Because as much, like, what are the dark clouds in the horizon that we're seeing? And for us, we see two main things. One, we see a potential slowdown in China that might manifest in something more serious. Right now, the Chinese economy is slowing. This was before what's in the news with Evergrande, it has been slowing. And that's been the government policy, where they want to have a more moderate rate, they want to have more inclusive growth. But if that gets really bad, then what will happen is that earnings of corporates both in the US and globally will be impacted.
The second big risk, and something you've talked about when you've had multiple guests on, is inflation. Right now, we're seeing significant increases in inflation. And the consensus is that it's transitory. But what happens if these inflation pressures actually start weighing on companies' margins? Actually affect the US consumption where price increases have to be passed on?
What normally happens in that scenario is that the US consumer will start retrenching on consumption and increase savings because they see a higher inflation in their pipeline. And that will weigh on both economic growth and earnings. So those are things we're watching. But as of right now, for the original question about, yes, peak earnings. But at this point, peak earnings growth, but not peak earnings yet.
ANTHONY OKOLIE: Damian, thank you very much for your insights.
DAMIAN FERNANDES: Sure. Thanks, Anthony. Always a pleasure.