Investment Insights: Gray Friday?

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

As Thanksgiving approaches, so does the craving for turkey, cranberry sauce, and other traditional activities, including the expectation for year-long earnings of retailers to magically turn positive overnight. Black Friday, the cornerstone of the domestic retail calendar, has amalgamated into a black weekend, Thursday night, or even an online experience that allows consumers to avoid the annual pilgrimage to the brick and mortar shopping mall. The question, as always, is whether this year’s sales will be bigger, better, and more extravagant than last year or will fickle spenders force stores to reverse course; close earlier, open later, and/or push shoppers to seek online deals.

A woman looking at her phone, while shoppingA report from the National Retail Federation found that the average amount consumers spent over the weekend totaled $289.19 in 2016. This included both in-store and online shopping. Spending in 2016 was actually down a bit from 2015, when the figure was $299.60. However, the quantity of shoppers versus the quality saved retailers last year, as weekend shoppers grew 2% to compensate for the increased thriftiness, as reported by Bloomberg.

Although the economy is in its third longest economic expansion in history, with unemployment at 4.1%, the Global Investment Management team still believes there has been a behavioral reset in consumers’ minds. The 2008 financial crisis and the corresponding recession has scared Americans into pinching pennies and avoiding overextension of balance sheets. Effectively, even though we are on some of the surest footing economically, consumers are still acting as though the rug could be pulled out from them at any time.

This year might be a bit different for several reasons. First, personal savings rates as a percentage of disposable income haven’t been this low since December 2006, wage inflation is holding steady at approximately 3.5% over the past 3 months, and to top it off, consumer confidence is at a high unseen since 2004. By and large, the most dramatic change over the past few years isn’t in the amount spent, but what platform it was spent on. Consumer behavioral patterns have shifted toward e-commerce shopping, with sales up 18% from 2015 to 2016, as reported by Bloomberg. Online retailers such as Amazon have also sped up the spending with “Amazon Day” and “Black Friday Deals Week,” which has muddied the waters such that analysts might need to look at the entire month for an inclination of earnings expectations, rather than just the headline number for Black Friday.

Regardless, the question from our clients has been, “Are retail stocks dead?” and if not, “Then, how do we play the sector?” The somewhat glib answer is to be diversified. The retail sector, as described by S&P Dow Jones, is approximately 87 stocks representing 1.6 billion in market cap. This may seem quite large when compared to the S&P Total Market Index, however the sector only represents approximately 5.6% of the total market and about 2.3% of the companies in the United States. The diversification answer isn’t meant to roll the eyes of investors. It is a warning, given last week’s and last month’s earnings reports. This included a beat by Footlocker (a more traditional brick and mortar) on November 16, which propelled the stock 28.16%, and a beat by Amazon (an online retailer) on October 26, which lifted the stock 13.22% the next day. Our team isn’t saying the picture is all roses in the sector; active short interest on the Retail SPDR ETF is still approximately 2 to 1 versus long interest per Bloomberg, and as mentioned above, there are plenty of reasons to remain cautious. We still believe that retail sector sales will be strong and might surprise a few people to the upside when taken in context of the rest of the week, especially when looking at the strong backing of economic fundamentals that favor the U.S. consumer.
Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.


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