Liz Looks at: Retail Health

By: Liz Young Thomas · November 16, 2022 · Reading Time: 5 minutes

Spend Game

It’s mid-November, which means we’re about to embark on the beloved holiday season. For most, the holidays mean eating, drinking and being merry. But, for investors, the holiday season means gauging the health of retail spending.

Given the seemingly endless debate over recession, this season’s retail spending is likely to be one of the most talked about indicators. The tricky part is we already have several conflicting data points that make the expectations hard to nail down.

Retail sales data for October came in above expectations at +1.3% month-over-month, consumer spending grew more than expected in September, and the savings rate fell to a post-global financial crisis low of 3.1%. These data points suggest consumers are still on quite a spending spree.

Meanwhile, individual consumer-dependent companies have reported conflicting results. Home Depot and Walmart both beat Q3 earnings estimates, and Walmart raised its profit outlook. Conversely, Target missed estimates because of a reported pullback in demand, and lowered its outlook for Q4. Recent reports suggest that Amazon will be laying off 10k workers, an unusual move ahead of the holiday season, when the company has historically added employees.

Opposing forces, for sure.

Shopping for Optimism

Over the last month, the stock market has been looking for reasons to rally, and it’s found a few. Inflation has cooled, the labor market remains strong, Q3 GDP was positive, valuations at the September & October lows were attractive, and investors in general are just tired of bearish sentiment. But the fact remains, the market doesn’t care about our feelings.

One possible bright spot is the force of seasonality. Markets tend to like the holly jolly spending season, so much so that there’s a name for the rally that tends to happen at the end of the year: ”Santa Claus Rally”. (For what it’s worth, I think “Santa Claus Rally” holds as much predictive power as “Sell in May and Walk Away,” which is minimal and coincidental at best.)

Nevertheless, it can become a self-fulfilling prophecy as investors search for reasons to be merry. What’s more useful in this environment, is to look at the past behavior of industry groups. We’ve seen wide divergence between winners and losers in 2022, and it’s paid to be a discerning investor.

Despite what holiday season spending may suggest, Retail stocks tend to be in the top three for November, but in the bottom three for December, and somewhere middle-of-the-pack in January (noticeably absent from the table). What’s even more interesting is that services categories, not goods, have historically led in December.

So does retail spending really tell us much about the direction of the market? I wouldn’t put all of my candy in that stocking.

Activity Speaks Louder than Seasons

Seasonality has a place in market analysis, and has some predictive power. But the power of the economic cycle is stronger, no matter the time of year. With 375 basis points of Fed rate hikes so far, an inverted yield curve, spikes in inflation, and commodity prices still a part of the narrative, we can all but conclude that we are late in the economic cycle.

What’s more, some of the cyclical indicators of economic activity are flashing warning signs that confirm our “late cycle” location: ISM New Orders fell into contraction territory, small business optimism is near Covid lows, and capacity utilization turned down in October.

Perhaps even more telling is the level of inbound container shipments at the Port of LA, which has fallen notably since summer, and is now below the 2010-2019 average.

If data is still strong, and consumers are still spending, when will the economic cycle become an impediment to this, if ever? When the labor market breaks, in my opinion. People will keep spending until they’re concerned about their jobs. The layoff cycle is already hitting Tech and the question is whether it will hit other industries and become more broad-based.

At this point, I would expect holiday spending to look healthy through the end of November, considering some of this weak economic data hasn’t affected sentiment much yet. But as demand cools further, and more companies deliver either layoffs or lowered outlooks, consumers are likely to reevaluate their spending. Not to mention, if layoffs spread far and wide, and enough companies lower their guidance, another drop in stocks is likely.

The spending reduction could happen as soon as December, and lowered guidance for 2023 could also roll in around the same time, both of which would put this recent rally in a precarious position. The good news is if another market drop materializes, I think it may be the last one. I know it’s been a long and rough market road so far, and I think we’re getting close to the end, but we’re not there yet.


Want more insights from Liz? The Important Part: Investing With Liz Young Thomas, a new podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

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