Look who’s shopping

Stocks closed modestly lower as traders wallowed back to their desks for the year’s final push. New home sales remain at pre-pandemic levels while existing home sales continue to dive into the abyss.

What’s happening around the mall. Did you spend the last few days shopping in your slippers? Ok, so you’re a traditionalist who likes malls; how did that mall visit go? Well, depending on the latest numbers circulating on the tape, high-end malls are not getting the traffic they once had. In fact, high-end malls are experiencing a -10% decline in visits from a year ago. For reference, ordinary malls also experienced a decline, but less. Is there some sort of pattern here? Well, if we ascend above the mall and simply look at retailers, we can see the pattern even more clearly. Bloomberg put together an index of 30 higher-end retail brands and tracked debit and credit card spending at those companies and compared it to national retail sales figures. Check out the chart below, and then keep reading.

As you can see from this nice chart, sales growth of higher-end brands has been slipping since the Fed started raising interest rates early last year. Not only has the growth slowed, but it has turned negative. Further, the declining trend does not appear to be letting up leading into this year’s holiday season. In contrast, overall national retail sales growth has slowed since the rate hikes started, but at a far slower pace and while annual growth is anemic, it is still positive, and if you look really, really closely  you will notice a slight pickup leading into the holiday season.

Getting back to those 30 establishments in the Bloomberg index, they include companies like Apple, BestBuy, Bloomingdale’s, Nordstrom, Polo Ralph Lauren, and Williams Sonoma. These are companies whose average purchase baskets are greater than $100 (except for 2). Recall also that this data is based on purchases made with credit and debit cards which means at least some of the declines may be due to higher interest rates. Numbers like these along with surveys have led analysts to conclude that consumers earning over $100k are beginning to cut back on discretionary spending, and those consumers can be viewed as leading indicators. Why? Because they presumably have more ability to make purchases (more money lying around ), so if they are pulling back, one would expect the broader base of consumers to follow suit.

So, what does this all mean? Well, we can look at this in two ways. We can assume that these trends are not positive for economic growth and, more specifically, retailers. Even more specifically, higher-end retailers. We all own some equities in at least some of those retailers . But we can also view it from the Fed’s perspective. From that lens we can see the marked turn-around resulting from higher interest rates. Lower consumer demand should allow price inflation to moderate, which it has in recent months. This makes it less likely that the Fed will have the urge to hike rates further as its handy work is beginning to pay off. Regarding rate cuts… well, if this trend continues, it may not bode well for overall economic growth. Remember that consumption makes up some 2/3 of GDP. GDP has been on the climb more recently. The final quarter of this year is expected to come in at an annualized rate of +2.5%, which is quite a bit higher than the final quarter of last year, which only grew at an annualized rate of +0.7%. Looking forward to next year, analysts expect these numbers to slow significantly in the second half of the year. Funny how those expectations line up perfectly with the increases in rate cut probabilities according to futures and overnight index swaps.

Ok, so I will conclude with some information for those of you who shopped in slippers. According to Adobe Analytics, shoppers spent a record $9.8 billion online shopping on Black Friday. High-ticket items like smart watches, TVs, and electronic equipment were +7.5% higher than a year ago. Salesforce Inc reported that online sales increased by +9% year over year, also an impressive showing considering inflation and interest rates resting near 20-year highs. While those numbers are certainly impressive, it is important to note that those are seasonal upticks. Looking back at the trends in the above chart, it may take a bit more than a few big splurge days to turn hose around.

WHAT’S UP or down IN THE MARKET THIS MORNING

The Boeing Co (BA) shares are higher by +1.69% in the premarket after RBC upgraded its rating to OUTPERFORM noting an uptick in sentiment toward the company. Further, RBC sees continued strong demand for commercial and defense aerospace. The median P/E for the group is expected to expand slightly next year and more noticeably in 2025. Potential average analyst target upside: +11.5%.

Edward Lifesciences Corp (EW) shares are lower by -2.1% in the premarket after Wolfe Research downgraded the stock to UNDERPERFORM. Wolfe expects further declines in the company’s aortic-valve replacement products as the category matures. With a forward P/E of 26.74x, the company appears fairly price compared to its peers which have a median forward P/E of 27.23x. Potential average analyst target upside: +18.6%.

YESTERDAY’S MARKETS

NEXT UP

• FHFA House Price Index (Sept) is expected to have climbed by +0.5% after gaining +0.6% in August.
• Conference Board Consumer Confidence (Nov) may have slipped to 101.0 from 102.6. Pay attention to this, because it is a leading indicator to all the stuff I mentioned above ☝. Pay particular attention to the Expectations component of the release.
• Lots of Fedspeak today. Expect to hear from Goolsbee, Waller, Bowman, Barr, and Paese.