Black Friday can offer investors clues as to how much gas is left in the tank: here's what to watch out for

Black Friday can offer investors clues as to how much gas is left in the tank: here’s what to watch out for

Black Friday comes at an interesting time for the American consumer. Buyers have seemingly persevered this year despite an all-out assault on their wallets and net worth — from falling stock prices and, more recently, home valuations, to runaway inflation that has eroded their purchasing power.

But after a host of major US retailers, including Walmart Inc. WMT,
+1.51%
and Target Corp. TGT,
+0.54%
have warned their shareholders of the weakening US consumer and most major investment banks have warned of an impending recession in 2023, investors are right to ask: how much strength does the US consumer have left?

It’s a question they’ll be asking next weekend and probably until the end of January, now that the holiday shopping season has turned into a four-month chore marked by increasingly generous discounts. as retailers battle for dwindling customer dollars, several economists told MarketWatch. .

Already, some cracks in the consumer facade are beginning to show. The October retail sales figure released this week by the US Department of Commerce saw sales of goods and services rise 1.3% in October. However, some details of the reports were much less optimistic: department store sales, as well as sales of sporting goods, clothing and consumer electronics, were all particularly weak, especially if inflation is taken into account. .

See: US drivers are likely to pay the highest Thanksgiving gas prices on record

And although wages have risen this year, they have barely kept pace with rising prices, as the October jobs report, released by the US Department of Labor earlier this month, showed. Wages rose only 0.4% in October, bringing the growth rate of the past 12 months to 4.7%.

To top it off, consumer debt borne by Americans hit a new all-time high at $16.5 trillion in the third quarter of 2022, according to data released quarterly by the New York Fed. Meanwhile, the Personal Savings Rate, released monthly by the Bureau of Economic Analysis, fell to 3.1% in September. Since 2008, readings below 4% have been extremely rare.

The average net worth of Americans is still more than 20% higher than it was before the pandemic.

According to Dec Mullarkey, managing director of investment strategy and asset allocation at SLC, “the consumer is in pretty good shape,” he said.

But that is changing rapidly, it seems.

And, as the holidays approach, some economists are starting to see more and more signs that consumer spending may not be able to continue to grow at such a strong pace, said Van Hesser, senior managing director and Chief Strategist at Kroll Bond Rating Agency who focuses on the consumer in his work.

“The way we think about it is that this holiday season could be the last hurrah for the consumer in this cycle,” he said.

How far will retailers go with discounts?

Thanks to the lingering effects of the pandemic, many big-box retailers have found themselves stuck with unsold inventory, from consumer electronics to home furnishings. Now the holiday shopping season and Black Friday will test how far they’re willing to go with their discounts to empty that inventory, or risk being stuck with it as the full effect of interest rate hikes from the Federal Reserve hits the economy in 2023.

“I think going into a perceived downturn for the economy – who knows if that’s going to happen or not, but the perception generally is that it’s going to happen – if you go in there and you have a long inventory, which you’re going to do is try to get rid of this stuff as best you can,” said Josh Shapiro, chief US economist at MFR.

One of the main issues is that consumers have been bombarded with sale emails and advertisements for weeks, so the deals offered by retailers will likely need to be enticing enough to grab consumers’ attention.

“Many consumers are simply numb to Black Friday sales because they’ve been seeing them for six weeks,” said Natalie Kotlyar, country practice leader for BDO’s retail and consumer products.

This puts smaller retailers in a particularly difficult position, said James Gellert, chief executive of RapidRatings.

“Many smaller and private companies up the retail supply chain have been squeezed and struggle to absorb higher material and labor costs without being able to pass on all those costs” , Gellert said.

Ultimately, the distance retailers travel to move their inventory can tell a lot about the state of the retail industry.

“Black Friday” is not a marathon, it is a work of several months

After being pulled forward during the pandemic, US consumers’ appetite for non-essential goods like electronics and furniture has dwindled significantly.

“Homewares have been a hot item for many years. How many air fryers does one person need? said Kotlyar.

And now, some expect Black Friday to confirm what they’ve seen all year: a steady decline in spending on consumer goods as Americans adjust to budgeting for other priorities, like eat out or attend concerts and sporting events.

“Obviously the consumer is weakening, and if you look at what’s happened with Target and Walmart and other companies that reported this week, that’s very consistent with the numbers that they reported and advice they provided,” said Phil Orlando, chief equity officer. market strategist at Federated Hermes.

Holiday shopping has grown aggressively in recent years to include four months — September, October, November and January, Orlando said.

One problem with that, however, is that investors are now wondering what data like October retail spending really means. Does this suggest that consumers are simply doing their holiday shopping in advance? Or does that mean the holiday sales will be “particularly festive” this year?

How much “fuel” is left in the “tank”?

It can be difficult to judge how much fuel is left in the tank. In the end, the answer is probably more complicated than a simple “yes” or “no”.

Although consumers received billions of dollars in cash during the pandemic, bloated household savings have declined rapidly this year as inflation rose while the value of financial assets declined.

The amount of excess savings on household balance sheets has been halved over the past year, and much of what remains is believed to belong to the wealthiest households, according to a report by ‘Oxford Economics.

Another problem highlighted by Oxford Economics is that most of the US economy’s savings reserves reside with wealthier households, which generally have a lower propensity to spend them.

While the wealthiest Americans should have little trouble managing the increased debt burden, lower- and middle-class families have been forced to rely more on credit cards.

Looking ahead, the US economic data schedule is relatively light over the next holiday-shortened week, although investors will be getting the minutes from the Federal Reserve’s latest meeting.

U.S. stocks cemented a loss for the week on Friday as renewed concerns over the pace of Fed monetary tightening helped undermine stocks: the Dow Jones Industrial Average DJIA,
+0.59%
ended with a marginal weekly loss at 33,3745.69, while the S&P 500 SPX,
+0.48%
fell 0.7% to 3,965.34 and Nasdaq Composite COMP,
+0.01%
fell 1.6% to 11,146.06.

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