The holiday season is finally here. Thanksgiving is now in the rear-view mirror, and the 4-week sprint to Christmas is ahead.
I’m already working out the details of getting my kids to southern Georgia from College Park, Maryland, and New Orleans (my daughter gets home from Europe on the 16th). I’ve even started a rough draft menu for their visit.
And I must say the distraction from inflation, recession, and politics is a relief. With all the fear-mongering about the trajectory of inflation we are constantly subjected to on the evening news, it’s easy to see how an economic recession can become a self-fulfilling prophecy.
I love you, Lester Holt, but sheesh, give it a rest.
Of course, the financial media isn’t going to give it a rest. Every anecdotal data point about spending this Christmas season will be framed by the “health of the consumer” backdrop.
Like the “consumers step up: $9.2 billion record for online spending on Black Friday” headline. Oh, big number, must be good, right?
Well, it’s not bad, exactly.
But the thing is, e-commerce has its own momentum. Every retailer is pushing online sales. It shouldn’t be a surprise that people avoid driving, parking, and standing in lines and opt to click a few buttons on their phones.
Frankly, I’d be surprised if online spending failed to hit a new high watermark this year and every year for the next decade.
Still, e-commerce isn’t the best barometer for retail sales. Online sales still only account for 14%-15% of all retail sales. Not a drop in the bucket, but it also doesn’t give us anything resembling a complete picture.
Hitting the Target
I hate to bring up bad news at this cheery time, but let’s turn the clock back a few weeks to Target’s (NYSE: TGT) third-quarter earnings report. Target said it ended Q3 with $17 billion worth of inventory – equivalent to 65% of the sales revenue it managed for that quarter. In other words, Target comes into the all-important 4th quarter with the most inventory it’s had in 4 years.
Plus, Target expects total sales to be “low single-digits” and operating profit margins around 3%.
The plan for Target seems pretty clear: everything must go. Target has almost no choice but to discount its inventory to whatever level just to get it out the door. That’s why it started “Black Friday” deals back in October. And it’s why Target’s profit margin forecast should be considered just a guess.
Now, it’s true, Target’s third-quarter earnings report was by far the worst of the big retailers. Walmart (NYSE: WMT) and even Macy’s (NYSE: M) were much, much better.
Still, the fact that Black Friday discounting for toys was between 34% and 50% suggests that the need to make sales and move inventory is a bigger concern than profit margins.
Other data points also hint at the challenges retailers face this year…
For instance, the National Retail Federation says holiday retail sales rose 13.5% last year and 9.3% in 2020. But this year, they will only grow 6%-8%, to $942.6 billion and $960.4 billion. It could be argued that the current inflation rate will account for much of this year’s sales growth.
Lower-income families (under $75,000) are expected to spend less this year versus last year.
Then there’s Black Friday foot traffic, which is estimated to be up between 3% and 7%. Those are not what you’d call robust numbers.
All in all, there’s plenty of reason to suspect that the 2022 Christmas shopping season isn’t going to be a particularly good one.
About That Santa Claus Rally
It is generally assumed that the stock market will trade with a positive bias as we approach Christmas. And sometimes, the good vibes will even manifest and a solid rally higher, otherwise known as the “Santa Claus Rally.”
Sadly, I don’t think we will see much of a “Santa Claus Rally” this year. Yes, the retail picture factors into that. But I’m also looking at the technical picture of the S&P 500…
The S&P 500 has already put in a pretty good rally since mid-October. It has moved firmly above its 50-day moving average (purple line) at 3,794. And it is currently making a run at the 200-day moving average (black line) at 4,054.
Now, the 200-day moving average is widely considered to be the long-term trend line. When the S&P 500 is above the 200-day MA, it’s a bull market. Below that point, it's a bear market. You don’t need me to tell you we’ve been in a bear market most of this year.
It is encouraging to see the S&P 500 rallying close to the 200-day MA. And it would be even better if the index could move above it and signal a new uptrend for stock prices.
But notice how the 200-day MA line in black coincides with the green line that I’ve drawn. That green line is the downtrend line that has marked the tops for this bear market since last December.
Here’s a look at that same downtrend line on a 5-year chart (with moving averages removed for clarity)…
It is highly unlikely that the S&P 500 breaks above that green downtrend line and the 200-day MA around 4,050. Those lines are likely to mark the top of any rally we see this Christmas season.
Until next time,
The Profit Sector