Americans have money, and they plan to spend it during the holidays 🎁
Plus a charted review of the macro crosscurrents 🔀
📈The stock market climbed to all-time highs, with the S&P 500 setting an intraday high of 6,017.31 and a closing high of 6,001.35 on Monday. For the week, the index shed 2.1% to close at 5,870.62. It’s now up 23.1% year to date and up 64.1% from its October 12, 2022 closing low of 3,577.03. For more on recent stock market moves, read: Wall Street reacts to the election results 🇺🇸 and Keep your stock market seat belts fastened 🎢
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Americans plan to spend more on holiday shopping this year than they did last year.
That’s the takeaway from pretty much every consumer survey conducted over the past several weeks. Below are some highlights (emphasis added):
“Our proprietary survey of ~2,000 US consumers reveals a more positive outlook for holiday shopping versus 2023 and 2022. Overall, 37% of consumers are planning to keep their holiday budgets roughly the same, 35% expect to spend more, and 22% expect to spend less yielding a net of +13%.“ - Morgan Stanley (11/13)
“Consumer sentiment has also shown signs of improvement, and the 2024 Bank of America Holiday Survey suggests people are planning to spend $2,100 outside of typical obligations and necessities this holiday season, up 7% YoY.“- BofA (11/12)
“According to The Conference Board Holiday Spending Survey, the average US consumer intends to spend $1,063 in nominal terms on holiday-related purchases in 2024, up 7.9% from $985 in 2023. This is also higher than in 2022 ($1,006) and 2021 ($1,022). On gifts, consumers plan to spend an average of $677, up 3.4% from $654 last year. After slumping last year, consumers’ budgets for non-gift items such as food, decorations, and wrapping paper are also up 17% at $387.“ - The Conference Board (11/12)
“Some 89% of consumers admitted they're tempted to spend more than they should during the holiday season, while 94% indicated they'd be tempted to make an unplanned purchase if the item were on sale. Over half (55%) of consumers said holiday deals have caused them to overspend; these big spenders said they are most likely to splurge on gifts for others.“ - Experian (11/4)
“Consumers are reaching a little deeper into their pockets this season, their average holiday budget rising 4% y-o-y to $613, according to Accenture's 18th Annual Holiday Shopping Survey.“ - Accenture (10/30)
“In a year when sustained consumer spending propelled growth and helped the economy skirt recession, we're calling for a fairly modest holiday sales season. We look for holiday sales to rise just 3.3% in November and December compared to last year, which is slower than last year and below the long-run average.“ - Wells Fargo (10/28)
“Gallup’s initial measure of Americans’ 2024 holiday spending intentions finds consumers planning to spend an average of $1,014 on Christmas or other holiday gifts. This is substantially more than their forecast of $923 at the same time last year, signaling that the 2024 holiday shopping season could be a bit kinder to U.S. retailers.“ - Gallup (10/25)
“Consumer spending on the winter holidays is expected to reach a record $902 per person on average across gifts, food, decorations and other seasonal items, according to the National Retail Federation’s latest consumer survey conducted by Prosper Insights & Analytics. The amount is about $25 per person more than last year’s figure and $16 higher than the previous record set in 2019.“ - National Retail Federation (10/22)
“U.S. consumers are set to spend 4% more on holiday shopping this year, with average spending projected to reach $948, compared to $911 in 2023, according to the KPMG 2024 Consumer Holiday Shopping Survey.“ - KPMG (10/21)
“After expressing record holiday spending intentions in 2023, respondents are yet again planning to up their purchases, and expect to spend $1,778 (+8% year over year) this holiday season. The uptick in spend is attributed to a rosier economic outlook (+9 percentage points [PP]), perceived higher prices (70%), and an increase in spend by the $100K to $199K income group (+17%).“ - Deloitte (10/15)
“Despite 59% of consumers saying that inflation will probably influence their holiday spending this year, overall spending is projected to increase by 7% to an average of $1,638 per shopper.” - PwC (10/1)
We’ll have to wait to see if consumers come through and actually spend more this year.
If they do, it would be consistent with the years-long narrative of record consumer spending. Just this past Friday, we learned retail sales in October rose to a record $718.9 billion.
All this spending has been supported by healthy household balance sheets and real income growth.
Household finances are in good shape 👍
Sure, households aren’t as flush as they were earlier in the economic recovery — but they remain strong relative to history. (More here and here.)
This is best reflected by the debt-to-income ratio, which remains at historically low levels even as aggregate debt has been rising.
“Although household balances continue to rise in nominal terms, growth in income has outpaced debt,” wrote Donghoon Lee, Economic Research Advisor at the New York Fed.
It’s a reminder to take headlines like “US Household Debt Rises to $17.94 Trillion: N.Y. Fed“ and “Credit card debt hits record $1.17 trillion“ with caution because they lack the context you need to avoid drawing the wrong conclusions. Better headlines read like “Household debt is up, but Americans are in a better spot to pay it“ and “NY Fed says household debt up in third quarter as rising incomes ease debt burden.“
And in case you’re wondering: Households have a long way to go before they max out their credit cards, as the New York Fed chart below shows.
Yes, debt delinquencies have been rising. It’s an economic warning sign to keep an eye on. But for now, they can be characterized as normalizing.
“Aggregate delinquency rates edged up from the previous quarter, with 3.5% of outstanding debt in some stage of delinquency,“ New York Fed researchers noted. That’s significantly below Q4 2019 levels.
Also, it’s notable that wage growth has outpaced inflation for 18 months.
“This is how most Americans will ultimately be able to get ahead,” The Washington Post’s Heather Long wrote. “Prices won't go down, but wages will go up enough to offset the higher prices.”
We’re also on a 46-month streak of net job creation in America. When more people have jobs, more people have money to spend.
Zooming out 🔭
With a new political party moving into the White House next year, we can expected an upheaval in consumer sentiment.
But as we’ve learned in recent years, people won’t put their lives on hold just because sentiment is poor. If they have money, they will spend it.
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Related from TKer:
Consumer finances are somewhere between 'strong' and 'normal' 💰
Unsettling stats about consumer health are missing the bigger picture 💵
Beware how your politics distort how you perceive economic realities 😵💫
Review of the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🛍️ Shopping rises to new record level. Retail sales increased 0.4% in October to a record $718.9 billion.
Strength was broad with growth in electronics, cars and parts, restaurants and bars, building materials, and online shopping.
For more on the consumer, read: The state of the American consumer in a single quote 🔊 and There's more to the story than 'excess savings are gone' 🤔
💳 Card spending data is holding up. From JPMorgan: “As of 08 Nov 2024, our Chase Consumer Card spending data (unadjusted) was 0.8% above the same day last year. Based on the Chase Consumer Card data through 08 Nov 2024, our estimate of the US Census November control measure of retail sales m/m is 0.35%.”
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 217,000 during the week ending November 9, down from 221,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
👍 Inflation remains cool. The Consumer Price Index (CPI) in October was up 2.6% from a year ago, up from the 2.4% rate in September. This remains near February 2021 lows. Adjusted for food and energy prices, core CPI was up 3.3%, unchanged from the prior month’s level.
On a month-over-month basis, CPI was up 0.2%. Core CPI increased by 0.3%.
If you annualize the six-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 2.6%.
For more on inflation, read: The end of the inflation crisis 🎈and The Fed closes a chapter with a rate cut ✂️
👍 Inflation expectations remain cool. From the New York Fed’s October Survey of Consumer Expectations: “Median inflation expectations fell at all three horizons in October. One-year-ahead inflation expectations declined by 0.1 percentage point to 2.9%, three-year-ahead inflation expectations declined by 0.2 percentage point to 2.5%, and five-year-ahead inflation expectations declined by 0.1 percentage point to 2.8%.”
However, the introduction of tariffs as proposed by president-elect Donald Trump would be inflationary. For more, read: Wall Street agrees: Tariffs are bad 👎
⛽️ Gas prices tick lower. From AAA: “The national average for a gallon of gas is now less than a dime away from dipping below $3 for the first time since May of 2021. But the possible formation of a new hurricane in the Gulf of Mexico could delay or even temporarily reverse the decline in pump prices. Since last week, the national average dropped two cents to $3.08.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.78%, down from 6.79% last week. From Freddie Mac: “After a six-week climb, rates have leveled off, but overall affordability continues to be an issue for potential homebuyers. Freddie Mac’s latest research shows that mortgage payments compared to rents on the same homes are elevated relative to most of the last three decades.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
👍 Small business optimism improves. The NFIB’s Small Business Optimism Index rose in October.
Importantly, the more tangible “hard” components of the index continue to hold up much better than the more sentiment-oriented “soft” components.
Keep in mind that during times of perceived stress, soft data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
🛠️ Industrial activity ticks lower. Industrial production activity in October fell 0.3% from the prior month. Manufacturing output fell 0.5%. From the Federal Reserve: “A strike at a major producer of civilian aircraft held down total IP growth by an estimated 0.3 percentage point in September and 0.2 percentage point in October. Hurricane Milton and the lingering effects of Hurricane Helene together reduced October IP growth 0.1 percentage point.“
For more on activity stabilizing as inflation cools, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀 and The US economy is now less ‘coiled’ 📈
😬 This is the stuff pros are worried about. According to BofA’s November Global Fund Manager Survey: “On tail risks… 32% of November FMS investors view higher inflation as the #1 biggest 'tail risk' (up from 26% in October). Concerns over geopolitical conflict took the 2nd place spot this month at 21% (down from 33% last month).”
For more on risks, read: Sorry, but uncertainty will always be high 😰, Two times when uncertainty seemed low and confidence was high 🌈, and What keeps me up at night 😵💫
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday dropped more than five full points from the prior week to 57% as many workers went to the polls on Election Day. Occupancy also declined on Wednesday compared to the previous week, dropping 3.6 points to 57.8%. Washington, DC saw the largest decrease with its peak occupancy day dropping more than nine points to 50% on Thursday. The average low was on Friday at 32.6%, down six tenths of a point from last week.“
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.5% rate in Q4.
For more on the economy, read: The US economy is now less ‘coiled’ 📈
Putting it all together 🤔
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
