Assessing Holiday Sales and the International Landscape

With the holiday shopping season officially in full swing, early estimates suggest that the American consumer is both in good spirits, and good shape financially. Data from multiple sources suggests that holiday spending will far outpace last year’s results.

While no one knows for sure exactly where the numbers will settle, those with insight into spending remain optimistic. Mastercard projected that overall sales on Black Friday totaled $23 billion, which represents a 9% increase from last year. They expect sales for the entire holiday season to grow 5% year-over-year.

That figure is very close to the initial estimates from eMarketer, a market research firm, which projected sales would rise 5.8% and top the $1 trillion mark for the first time. Adobe Analytics, who has visibility into many online shopping carts, said that consumers spent about $7.9 billion on Cyber Monday alone, up 18.7% from last year. That makes yesterday the single largest shopping day in U.S. history.

Of course none of this should be all that surprising considering that personal income has been rising at a greater than 4% rate ever since the beginning of 2017, consumer confidence is at an 18-year high, the economy recently added jobs for the 97th straight month, and wages during Q3 increased at the fastest rate in over a decade. But it’s still comforting to see, as consumers represent the primary driver of the U.S. economy.

Aside from noting the good start, that’s really all there is to say about holiday spending. So with that out of the way, let’s move on to the markets and economy.

Today I’d like to redirect our focus to the global landscape, as I continue to believe that’s where a lot of the pressure on the U.S. stock market is coming from. Specifically, we’re going to look at international GDP growth, what’s going on with oil, and the state of global manufacturing and services PMIs.

To begin, while the U.S. posted a strong 3rd quarter, a couple of major economies did not. Japan and Germany, the world’s third and fourth largest economies, both saw their economies contract during Q3. This has led to concerns that a global recession may be on our doorstep.

Germany and Japan Real GDP

But a deeper look suggests things might not be as bad as they seem. For Japan, which saw a contraction of 0.3%, much of the weakness can be attributed to extreme weather conditions and earthquakes. Japan’s economy is already showing signs of recovery, and economists are forecasting a rebound to 1.9% annualized growth in the 4th quarter.

As for Germany, which contracted 0.2% during the 3rd quarter, much of the blame is being placed on a drop in industrial output due to new vehicle emissions standards. The drop in auto output should reverse during Q4, and as a result, economists are anticipating a move back to 2% annualized growth.

I don’t particularly like the idea of writing off downturns in major economies as one-off events, but a look at global composite PMI data seems to paint a similar picture. In the chart below we can see both manufacturing and services global PMIs, as well as the composite global PMI, shown in bold.

Global PMI Output

The global manufacturing PMI has been declining for most of 2018, and reached a new short-term low during October, coming in at 52.1 (down from 52.2 in September). Recall that with PMIs anything above 50 signals expansion.

That’s the bad news. The good news is that service sector growth strengthened in October for the first time in four months. The latest reading was 53.4, up from September’s 52.9.

When considered together, this caused the global composite PMI to rise to 53.0 from last month’s 52.8. That marks the first increase in the composite PMI since mid-2018, and is a sign that while growth may be decelerating, it does not appear to be on a path to turn negative anytime soon. Without question, the tariffs are hurting the manufacturing side of this equation, so any relief there would be more than welcome.

But even without that relief, it does not appear that we’re headed for a global recession. Another way to invert the data for an enhanced view is to look at the percentage of global manufacturing PMIs that are in expansion territory.

That’s what this next chart shows, and as you can see, while we’ve seen a decline recently, over 80% of countries are still showing manufacturing growth. In fact, this view seems to be quite supportive of current conditions, with more countries still in growth mode than during the vast majority of this economic expansion.

Percentage of Global Manufacturing PMIs above 50

There are two worthy items to point out here before we move on. First, notice the big drop that occurred at the start of 2014. This may have contributed to the sharp drop in oil prices that commenced in mid-2014 and persisted until the beginning of 2016. Could we be seeing a repeat of this phenomenon now?

Second, notice that prior to the financial crisis, every single country was seeing manufacturing growth, but by the depths of the financial crisis, none of them were. It’s simply amazing to me how the repackaging and selling of tranches of debt, combined with the U.S. subprime mortgage crisis, caused a global catastrophe and affected every single country.

I think the takeaway from all this PMI data is that yes, we are not seeing global synchronized growth as we did during 2017, but worries about a global recession are perhaps a bit overblown. Especially if any progress is made with regard to trade.

Now let’s move on to oil. Notice in the chart below that the selloff in the S&P 500 (upper panel) commenced at the exact same time as the rout in oil (lower panel). This suggests that the two are related, and lends credence to the idea that U.S. markets are reacting to global growth scares – since that’s exactly how most money managers interpret a big drop in oil.

S&P 500 and Oil

But if that were the case, then one would think other commodities related to global growth would decline in similar fashion, and that’s not what we’re seeing.

In the chart below notice that oil (the red line) has fallen precipitously since the beginning of October, but declines in both copper and the rest of the industrial metals complex have not followed suit. In my opinion, this speaks to the idea that the drop in oil is once again a supply related concern.

Oil, Copper and the Industrial Metal Complex

Overall, it would seem that we’re going through a period of moderating global economic growth after a very strong 2017, but that a global economic recession is not imminent. If that’s the case, then we should see some stabilization in worldwide equity prices.

And if worldwide equity prices stabilize, then we should see U.S. equity prices stabilize as well. This is partly because we’re in the best shape, economically speaking, and also because as you can see below, our markets have been trading in lockstep with international markets ever since this correction began.

S&P 500 vs. All Country World Index (ACWI)

That’s it for this week. I hope you all enjoyed some time with friends and family over the holiday weekend and I’ll see you back here next Tuesday.

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