Consumers show resilience as the holiday shopping season kicks into high gear

ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL

WEEKLY MARKET PERSPECTIVES — November 28, 2022

Stocks notched a week of gains amid low trading volume, U.S. markets being closed on Thanksgiving, and a shortened trading session on Friday. The S&P 500 rose +1.5% last week, while the NASDAQ Composite eked out a gain of +0.7%. The Dow Jones Industrials Average added +1.8% on the week.

The 2-year U.S. Treasury yield closed the week at 4.48%, while the 10-year U.S. Treasury yield finished at 3.70%. This month's swift decline in rates (e.g., the 10-year yield falling from its peak of 4.21% on November 7^th) has helped the S&P 500 gain over +12.0% from its mid-October lows. At 4,026, the U.S. stock benchmark is fastly approaching its 200-day moving average of 4,056 and could encounter some resistance should traders choose to keep floating the S&P 500 higher this week. And while the NASDAQ is down over 30% over the last year, the tech-heavy index has gained +18.1% on average over the next year in prior periods where it has been down between 30% and 40%, according to Bespoke Investment Group. Moreover, over the next year, the NASDAQ was higher 73% of the time following such severe declines.

The U.S. Dollar Index fell on the week, as the dollar has depreciated roughly 6.0% from its September peak, with the euro, yen, yuan, and peso all moving higher versus the greenback as of late. Importantly, the weaker dollar could help ease the pressure on U.S. multinational profits in the fourth quarter, which has stressed financial markets this year. West Texas Intermediate (WTI) crude finished the week at $77.46 per barrel, and Gold ended at $1,751 per ounce.

Affordability and availability continue to be headwinds for housing; consumer sentiment rises moderately

Overall, the week was generally quiet, with most major economic releases coming out on Wednesday and before investors broke for the holiday. The flash November services Purchasing Managers’ Index (PMI) dropped further into contraction amid weaker demand and a decline in new business. In addition, the preliminary look at manufacturing PMI for this month showed activity dropped to a 30-month low, as new orders fell at their fastest pace since the beginning of the pandemic in May 2020. However, the PMI data also showed that firms are raising selling prices at their slowest rate in nearly two years, indicating consumers and businesses large and small are becoming more sensitive to price.

On the home front, October new home sales came in ahead of September’s pace and outperformed expectations. However, new home sales are down 5.8% year-over-year, while the median price of a new home is up +8.1% month-over-month. Affordability and availability continue to be headwinds in the housing market, while higher mortgage rates versus one year ago lock more would-be home buyers out of the market.

Final November Michigan Sentiment rose modestly from the preliminary reading but remained below October’s level. Notably, one-year inflation expectations within the report ticked down to +4.9% from +5.1% in the report’s first look. Five-year inflation expectations remained unchanged at +3.0%. Bottom line: While inflation has been running hotter than most would like this year, consumer expectations for inflation in the future have not become entrenched. This is key in allowing time for higher rates and tighter monetary policies to soak into the economy and, hopefully, slow inflation pressures. Importantly, if consumers believe inflation pressures will moderate over time, they may be less likely to demand higher compensation to keep up with rising prices—hence avoiding the vicious inflation feedback loop the Federal Reserve is so worried about.

The Fed acknowledges that inflation risk remains, but may slow the pace of rate hikes in December

Speaking of the Federal Reserve, the central bank has lifted its fed funds target rate by 75 basis points at each of the last four meetings. The current rate stands at 3.75% - 4.00%. But a look at the November 1-2 FOMC meeting minutes last week showed participants generally felt that a slower pace of rate hikes would allow the central bank to better assess the economic effects and inflation impacts from the cumulative force of its tighter policies this year.

Unfortunately, FOMC members did acknowledge that inflation risks remain skewed to the upside, while economic risks are skewed to the downside. Notably, while the Fed largely communicated through the November minutes that it is likely to slow rate hikes down to 50 basis points in December, the terminal rate (i.e., the top-level fed funds rate at which the central bank finally pauses) is probably higher than first thought. This is because inflation has remained stubbornly well-anchored, despite aggressive rate hikes this year, and the labor market is only slowly coming into better balance. In our view, this keeps the Fed firmly in a position to press rates higher into next year, albeit at a slower pace.

Stocks likely to experience volatility in 2023; holiday shopping is in full swing

Also, we suspect stocks may continue to deal with bouts of volatility next year, as the terminal rate remains a moving target and dependent on developments associated with inflation/growth. Stock prices seldom build off a sustainable bottom and into the next expansion phase until it is clear the Fed is done or will soon be done raising interest rates, and growth appears to be bottoming. While the Fed is now willing to acknowledge it can slightly let up the gas on rate hikes, applying the brakes, or dare we say throwing the car in reverse, are maneuvers not yet in scope today.

The holiday shopping season is in full swing. The National Retail Federation estimated roughly 166 million people shopped over the three-day Black Friday spending extravaganza. According to Adobe Analytics, e-commerce spending on Black Friday rose +2.1% year-over-year to a record $9.12 billion. And that’s after the $5.29 billion consumers spent on Thanksgiving Day, which was up +2.9% versus last year. Purchases of electronics, smart home items, and audio items led the way. For some perspective, shoppers typically spend $2 billion to $3 billion online on any given day, per Adobe. Adobe estimates shoppers will spend an eye-popping $11.2 billion on Cyber Monday, representing a +5.1% increase over last year, and cement the day as the biggest online shopping day of the year.

Notably, retailers are under increasing pressure to reduce inventory, provide discounts to drive traffic, and attract customers that are increasingly becoming more price-sensitive in a high-inflation environment. The usual game of chicken between consumers and retailers is likely in play this holiday season, as shoppers may be more willing to procrastinate on completing their holiday shopping lists to score better deals as the holidays get closer. The National Retail Federation projects retail sales will increase between +6.0% to +8.0% over the holiday season.

In addition to the focus on how consumers are approaching the holidays, investors will receive a heavy slate of economic data this week that should also shed more light on the state of the U.S. consumer. November Consumer Confidence is expected to ease versus October levels but remain above July’s 17-month low. September S&P/Case-Shiller home price data, October pending home sales, and October personal income will be other data points that help color the consumer backdrop. FactSet estimates personal income will hold flat in October, while the month-over-month slide lower in pending home sales is expected to moderate versus September’s level. A second look at Q3 GDP on Wednesday should show no change versus the +2.6% quarter-over-quarter annualized pace seen in the preliminary reading. Finally, ISM manufacturing and nonmanufacturing activity in October is expected to have declined versus September levels but remain in expansion.

FactSet estimates Friday’s November nonfarm payrolls report will show the U.S. economy created +200,000 jobs this month, down from the +261,000 pace in October and the +315,000 pace in September. The unemployment rate is expected to hold steady at 3.7%. The job market has remained incredibly resilient this year, averaging roughly +289,000 jobs over the last three months, +347,000 over the previous six months, and +423,000 year-to-date. This year's slow and steady moderation in employment growth has been a key factor behind a still resilient economy and strong consumer, despite elevated inflation and higher interest rates. The Fed, as well as investors, would prefer employment growth to keep moderating slowly over the coming months to help avoid a sudden drop in economic activity and spending. November’s nonfarm payrolls report should provide an update on whether that trend remains in place as 2022 begins to wind down.