Markets Brief: Why Investors Should Pay Extra Attention to Shopping Trends This Holiday

Holiday shopping is in full swing, and investors will be watching intently for any signs of weakness in consumer spending, especially as jobs and wage growth slow down.

The holiday shopping season is always a closely scrutinized barometer for stocks and the economy. “There’s a lot of spending packed into this quarter, and that dictates what the forward year is going to look like,” says Jaime Katz, senior analyst at Morningstar.

But this year is a little different. Keeping a close eye on consumer behavior is “more important now than ever,” says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. Data on consumer health has been decidedly mixed, and retailers are bracing for a spending slowdown.

Analysts across the board expected a recession in 2023 after the Federal Reserve hiked interest rates to their highest level in 15 years, but that slowdown didn’t materialize. Stocks continued soaring as well, with the Morningstar US Market Index rallying 9.4% in November, bringing its year-to-date gains to more than 20%.

Why? “It’s the resilience of the consumer,” Zaccarelli says. Hopes for a long-awaited soft landing—a rare economic scenario wherein the Fed raises rates and tames inflation while avoiding a recession—hinge on consumers staying strong.

Will American Consumers Keep Spending?

Right now, myriad pieces of data point to households holding up just fine, even as economists agree that growth is slowing. Data from Bank of America showed that credit card spending for the week ending the day after Black Friday was up 1.7% compared with the same week last year. A survey of consumer confidence from the Conference Board recently ticked up after three consecutive months of declines.

Spending on airfare and hotels remains robust as well, and the labor market continues to add jobs, albeit at a slower pace than earlier this year. “We believe pretty strongly that as long as people are employed, they’ll continue to spend and the economy will continue to expand,” Zaccarelli says.

He also points to earnings surprises from companies in the consumer discretionary sector last quarter, which are “continuing to earn ... far higher than what people expected.” These are all good signs for the economy, which is good news for stocks.

The question is whether this good news can last. Other data shows signs of a clear pullback. Credit delinquencies are ticking up, and the use of buy now, pay later services is rising. Consumer sentiment data from the University of Michigan has fallen for four months straight. Personal spending rose in October, according to data released Thursday by the Bureau of Labor Statistics, but at a significantly slower rate than in previous months.

Economists have also warned that the savings cushions built during the pandemic have disappeared. Additionally, small segments of the population are beginning to feel the pain of high interest rates in various places, like new loans on cars and homes (though most existing car owners and homeowners have locked in lower rates) or higher credit card APRs.

Retailers Are Wary, but Margins Are Holding

“There is a general tone of caution” among retailers, Katz adds, as spending falls on discretionary purchases. “The companies understand that spending has held up okay, but things could go sideways pretty quickly,” she explains. She notes that consumers are still spending, but more conservatively than before—think smaller DIY projects rather than full home renovations.

Katz says one tailwind for companies servicing such needs is that improvement in inflation means retailers have been able to maintain their profit margins, or in some cases even improve them compared to the period before the COVID-19 pandemic. She points to Williams-Sonoma WSM and Wayfair W as examples.

Could a Bad Holiday Season Turn Out to Be Good for Stocks?

There’s another reason market watchers will be so intensely focused on holiday spending data, says Jason Draho, head of asset allocation Americas at UBS Global Wealth Management.

“The calendar has been cleared of obvious known risk events,” he says, such as uncertainty surrounding Fed meetings, inflation data, or a government shutdown. “That’s why a lot of focus will be on the labor market data and the consumer spending.” In other words, without much else to occupy the news cycle, the consumer will be under a microscope.

Of course, you can’t blame investors too much for that scrutiny. Slowing economic growth at high rates “could lead to justification for cutting rates,” Draho says, and the consumer and labor market are pieces of that puzzle. While strong consumer data could keep buoying stocks, he says weaker data won’t necessarily have the opposite effect: “It’s a little bit of a ‘Heads I win, tails you lose’ scenario.” Investors may brush off bad spending data as a momentary blip, but they also may see it as a sign that the Fed’s monetary tightening campaign is working and a signal that rate cuts could be coming soon.

Draho, however, puts less weight on the holiday season and consumer spending. While stocks may react to a read on holiday shopping, “there won’t be enough information one way or another to determine [whether] the consumer’s doing fine or rolling over.” Draho says we won’t have a complete picture until February or March, once all the data trickles in.

Draho also warns that the markets can be especially noisy heading into the end of the year, as some traders close their books for 2023. Reduced trading activity means less liquidity, which potentially means larger short-term price swings that may not tell investors much about longer-term trends.

For the Trading Week Ended Dec. 1

• The Morningstar US Market Index rose 1.1%.
• The best-performing sectors were real estate, up 4.7%, and basic materials, up 2.5%.
• The worst-performing sector was communication services, down 1.3%.
• Yields on 10-year U.S. Treasury notes fell to 4.22% from 4.47%.
• West Texas Intermediate crude prices fell 2% to $74.07 per barrel.
• Of the 847 U.S.-listed companies covered by Morningstar, 641, or 76%, were up, and 206, or 24%, were down.

What Stocks Are Up?

Plug Power PLUG, Lyft LYFT, and Sunrun RUN

What Stocks Are Down?

Farfetch FTCH, Chewy CHWY, and Cigna CI