In case you were unaware, today is “Cyber Monday,” a day invented by U.S. online retailers jealous of “Black Friday” for brick and mortar stores and “Singles Day” in China. It is a combination of the two, where deals are offered to encourage consumers to shop online for holiday items.
By the look of the data so far though, very little encouragement is needed. Hard numbers aren’t available in many cases, but so far the best estimates point to a new record for both sales and, more importantly, growth for the Black Friday weekend in general. Within those numbers, online sales have set their own records with Cyber Monday still to come.
Could this, then, be a case where the consumer comes to the rescue of the market?
If you can detach yourself for a moment from the emotion that comes with watching a market decline such as we have seen recently, one thing is clear. This is not about anything that has happened, it is about what might happen at some unspecified point in the future.
Yes, there were a few high-profile misses in the last earnings season, but still, according to FactSet’s Earnings Insight, seventy-eight percent of S&P 500 companies beat expectations for earnings last quarter, with earnings growing by nearly twenty-six percent.
There are fears of a global slowdown and fears specific to the U.S. regarding the effects of higher interest rates, but, based on those earnings, nothing bad has happened yet and the American consumer, who drives economic activity, is doing fine.
There are a couple of things things that we should all be aware of and that should temper enthusiasm somewhat. Firstly, I stand by my previously stated view that tariffs and manufactured trade wars are bad policy, and secondly, low interest rates have been the foundation of the market recovery for nearly a decade now, so rate hikes will inevitably have an effect, if only to make traders nervous.
The question for investors is whether those things merit what has happened to stocks since the end of October, and the answer seems to be “no.” There are reasons to believe in both cases that the end results of the changes, for both the markets and the economy, won’t be as bad as is feared.
As I said, tariffs and trade wars are bad policy, so bad in fact that it is hard to believe they will last too long. President Trump may have political reasons for wanting to continue to create enemies abroad, but there are enough smart people on his staff to point out that if doing that involves real damage to the economy, the political calculus changes. It is therefore hard to escape the conclusion that tariffs are a means to an end, not the end itself, and that they will be scaled back significantly or be gone altogether before too long.
The interest rate issue is more complex. Rising rates have more potential than even tariffs to damage the U.S. economy and whether they do or not depends on two things, the extent to which the changes drive capital into other investments, and how well the economy absorbs higher interest rates.
Low rates have encouraged investment in stocks during the recovery from the recession. When faced with treasury yields hovering around record lows, the risk inherent in stocks looks like a small price to pay for a market that historically average around a seven percent return and over ten percent if dividends are re-invested. As rates rise and yields climb though, that equation changes.
There have been plenty of periods of strong marker performance in the past when interest rates were significantly higher than they are now, but those have been when the economic outlook was strong, which brings us back to how well the economy absorbs these hikes.
Until now, the jury has been out on that question. There is evidence of business investment slowing, but that is not just inevitable as borrowing becomes more expensive, it is the intended result of hikes. In addition, investment is slowing from an artificial high created by virtually free money and a big tax cut. What matters is not that fixed investment is declining therefore, but how that affects economic activity elsewhere in the economy.
That is why the records being set for purchases over the weekend and the likely records for Cyber Monday matter. They will provide evidence that the damage done by both tariffs and rate hikes is being contained. That could be for any one or a combination of several reasons.
Companies may be more efficient now as a result of all that investment and better able to withstand the effects of bad policy, and/or they may be switching to investment in workers rather than plant and software. Whatever the reason though, if consumers are in the mood to spend it can cure a lot of what ails the market.
Fear is a strong emotion that frequently overrides logic, so we may still see some more volatility. If Cyber Monday is as good as advertised though, you and me, the American consumers, could be the cavalry coming over the hill to vanquish that fear and lead the charge back up.