For those of you who would prefer to listen:
Americans keep spending. Despite the inflationary pressures which seemingly lead to a path towards recession, Americans keep spending. The Consumer accounts for nearly 70% of the US Economy. It matters big time. The elevated spending is keeping the Market and the Economy afloat. This is not recessionary behavior.
The Stock Market had another wild week, as it tries to anticipate 2023. The Fed Chair put a charge into stocks on Wednesday when he indicated some slowing of the aggressive rate hike campaign could be ahead. Bonds rallied too as yields fell. He said a soft-landing is still doable. It’s all tied to inflation and jobs. November closed with a powerful rally, marking a 5% gain for the S&P on the month. In fact, it posted back-to-back monthly gains for the first time since August of 2021. It didn’t last. The November Job Report put a dent in the rally. But a midday reversal Friday made it barely noticeable.
The Job Market has been stubbornly strong, despite the Fed’s painstaking effort to weaken it. Another 263K jobs were created in November. 200K was the expectation. There’s more. The initial 261K jobs that were created in October got revised up to 284K. The unemployment rate is still low. 3.7% is near the 50-year low. Many companies still can’t find workers. There are still nearly twice as many jobs available as those looking for one. Here’s the deal: There’s never been a recession with unemployment at 5-decade lows.
There was a lot to chew on this week as economic data flew far and fast.
The US Economy grew 2.9% in Q3, a faster rate than expected. That followed the contraction in the first half of the year. Despite the recent increase in growth, it doesn’t look sustainable. Americans have been out and about a lot in 2022. It’s no wonder, 2+ years of lockdown has influenced that. But inflation and slowing growth could certainly put the brakes on robust economic activity. That’s what the Market is trying to decode.
There’s plenty for the Bulls and Bears to swallow. They’re both feeling empowered. In true Wall Street fashion, the Bulls and Bears wasted no time to brawl. They’ve been doing it all year. Volatility tends to jump. Price action explodes in both directions. It continues until one stands down. Right now, the Bull has the upper hand. I emphasize, right now. The Bear has clearly dominated 2022.
The fight centers around inflation and the health of the US Economy. The Bulls think inflation has peaked and a soft-landing is ahead, avoiding recession. The Bears see a crash-landing as growth is slowing, corporate profits are being squeezed and job losses are delayed but coming. This week brought something for both.
It was a record Holiday weekend for travel. Airports were jammed. 2.5 Million Americans flew the friendly skies on Sunday, marking the busiest single day since the pandemic began. Even more wanted to, but were held back due to storms. When you consider the number of flights that were cancelled due to weather, demand for travel remains sky-high.
Americans want to cruise too. 2023 is setting up to be busy on the High Seas. Carnival said it had a record Cyber Monday, with sales exceeding its 2019 record. Royal Caribbean recorded its single best sales day ever. That resulted in the cruise line’s highest volume booking week on record.
Overall, Black Friday brought a nice boost to Consumer spending with a 12% increase from a year ago. Mall traffic was thinner than expected but web traffic remained robust. Americans, with increasing frequency, are bypassing stores and spending more from the comfort of their couch. There was a 19.7% increase in online sales on Thanksgiving from a year ago.
Black Friday has sort of faded in relevance. Deals started well before the day after Thanksgiving and Americans keep increasing their spending online. E-commerce sales topped $9 Billion for the first time ever. Visits to indoor malls fell 14% from 2019 levels, while outlet malls saw an 18% drop. Nordstrom and Macy’s saw visits decline 25% and 29%. Meredith and her helper witnessed it firsthand. Costco saw visits decline 12%. Conversely, TJ Maxx, Home Goods and Ross saw increased traffic leading to more sales, eclipsing pre-Covid levels. Americans are trying to stretch their Dollars. It’s clear Americans want bargains.
Cyber Monday 2022 was the largest e-commerce sales day in US history. Consumers spent $11.3 Billion online on Monday. That was a 5.8% increase over last year. It even topped Black Friday sales. Adobe expects Cyber Week, the 5 days from Thanksgiving Day through Cyber Monday, to generate a total of $34.8 Billion in spending online, a 3% increase from 2021.
Overall, nearly 200 Million Americans made purchases over the weekend, whether in-store or online. That’s the most ever. The Bulls like these results.
Here’s what the Bears see: Unsustainable spending and a corporate profit squeeze. The average customer discount was above 30% this Cyber Week. That was an improvement from 2021 but below 2019’s 33% discounts. Retailers have to aggressively mark things down to move inventory right now. That’s deflationary for consumers. But it comes at the expense of retail profits, which could lead to weaker earnings in 2023.
There’s also this: Credit card debt is building again. There’s over $1 Trillion in credit card debt now. Americans seem to have burned through those record savings from 2020. Credit cards are amongst the most expensive kind of debt. There was an 88% increase in buy now, pay later campaigns. The option to pay in installments might mean more goodies to go around for the Holidays, but it comes at the expense of credit scores. Another sign of the squeeze: 17% of Americans say they are tipping less due to the tough Economy.
The November Consumer Confidence report was the lowest since July of 2020. The Consumer Confidence Index provides some insight into the state of employment, as well as business activity, financial conditions and people’s willingness to spend. More importantly, it provides opinions on both the current state of affairs, in the form of the Present Situation Index, as well as future estimates with the Expectations Index. Both are needed to make any type of investment decision.
So people are spending. But with inflation still an issue, they’re spending more to get less. The price of Oil has slipped of late. Oil erased all the 2022 gains earlier in the week before rebounding into the weekend. Gas prices have followed suit. Lower gas prices mean more money can be spent elsewhere. That said, the price at the pump is still elevated.
It’s also important to point out that spending is a moment in time. It reflects how people feel today and, to an extent, how they think about tomorrow. People spend more when they feel richer. People feel richer when they have a job and their house is rising in value. Home prices have fallen across the country as interest rates have climbed. People feel less rich. A 7% mortgage buys a lot less house. But anyone that wants to work can find a job pretty easily. For now, call it a Bull-Bear push on spending.
Back to the Market: After the powerful rally, are things overbought? Quick answer is probably. Over 90% of the S&P components got back over their 50-Day Moving Averages (DMA). November closed with a bang and a burst. It’s been an impressive move from the October lows. In fact, the S&P punched through its 200-DMA on Wednesday. That is a natural place for a breather. It fell back to it Friday.
Sentiment has improved too. The number of Bulls has increased with the rally. The VIX volatility index fell below 20 again, which is a sign of complacency. There’s nothing like price to change people’s attitudes. A correction might be pushed out to the new year. It could also come in the form of both time and price, since seasonality is so strong.
The biggest Market takeaway: Peak inflation. The data dump this week was full of evidence with declines in factory prices, shipping rates, commodity prices and fuel prices. The only major inflationary pressure is wages, but that helps consumers. The Market certainly took the Job Report in stride. Inflation doesn’t seem to be its primary trigger point anymore. The Yield Curve is the most inverted it’s been in 40 years. That’s the Bond Market sending a clear signal of economic trouble ahead. It’s just a very poor signal for timing. It seems evident though that the slowing Economy has taken inflation’s place for Market focus. We trust the Bond Market. It sniffs things out first.
For now, the path of least resistance appears to be to the upside. Seasonality is strong and the chase is on into year-end. Momentum has been solid. Keep in mind, December is historically the best month for stocks. It sure has been nice to see the green on our screens. But our focus is presently fixated on the year ahead. We think this Bull-Bear brawl is far from over.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
