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Investing in the Holiday Season: Where Can Investors Find Opportunities?

A woman shopping next to Christmas decorations.

As we head into the final months of the year, the focus moves to holiday shopping and the companies that may benefit from all that gift-giving. This year, investors may want to look elsewhere as recent data shows signs of a struggling consumer. This article discusses the outlook for the holiday season, what history can tell us about the end of this year, and some big data companies that could be a multi-year gift for your portfolio. 

Signs of a Struggling Consumer

Consumer spending is unlikely to bring retailers a merry end to 2023 as the data shows a trend towards frugality. The CNBC Supply Chain Survey conducted from Oct 21 to Oct 31 among logistics executives found that 67% of products being moved into stores are more promotional, lower-cost items, and 83% reported that they are not moving more higher-priced items into stores. 

The retail sales report for October was generally stronger than expected at -0.1% versus the -0.3% consensus, but the year-over-year trend slowed to 2.7% from 3.8% in September. Digging into the details, we see a clear shift from the more cyclical discretionary spending towards essentials. If we exclude groceries (+0.7%) and health and personal care (+1.1%), the headline number would have declined by 0.3%. Spending on food and drugs rose by around +0.8%, while discretionary spending declined by 0.4 % and real retail sales fell 0.7% year-over-year. 

That shift in spending is likely driven in part by what we saw in the New York Fed’s consumer credit report released last week, which revealed a sharp rise in newly delinquent loans, with 8.01% of credit card loans reported as newly delinquent. When spending rises faster than income, it means growing debt, and there’s a limit to that. October’s level is nearly double the low hit back in Q4 2021 and is the highest rate for newly delinquent credit card loans since 2011, when it was falling as the economy recovered from the Great Financial Crisis. A rise in this metric typically only occurs when the consumer is struggling, a sign there may be fewer boxes under this year’s tree. 

According to C.H. Robinson (CHRW), a global logistics company, retailers across the country are being more cautious about their inventory as they see consumer purchasing showing unusual restraint for the holiday season. For example, Target (TGT) reported that it is seeing a downward trend in consumer spending, even in food and beverage categories, due to increased budgetary stress, with discretionary items such as clothing and toys getting the hardest hit. FedEx’s (FDX) CEO Raj Subramaniam told CNBC that while the earlier inventory destocking at the big retailers has ended, retailers have yet to restock. 

The headlines might seem to be telling a different story with Home Depot (HDand Target (TGT) beating on their bottom lines, but digging into the details, the year-over-year trend in comparable sales declined 3.1% at Home Depot and 4.9% at Target. Target management guided for a mid-single-digits decline in sales and is offering its products at (you guessed it), lower prices. Its shares have taken off because the company is cutting costs, not because of a rosy outlook as weaker margins are on the way. TJX Companies (TJX) also gave soft guidance and saw a 6.0% drop in year-over-year same-store sales last quarter. That’s three major consumer companies all seeing weaker consumer spending. 

Market Outlook 

While there are signs of a slowing economy, the market and the economy are different and frequently not in sync. The S&P 500 has been up on a year-to-date basis every day since the first week of the year and is now up over 10%. According to research from Bespoke Investment Group, going back to 1942, any year in which the index was up 10-20% year-to-date as of early November, it has closed the year up at least 10%.

In addition, the level of assets in money market funds was relatively stable between Q2 2020 and Q3 2022 but has been rapidly growing since then, up nearly 18% over the past year. This is particularly noteworthy given that the dramatic increase in interest rates makes holding cash-like securities relatively more expensive. Assets typically flow into money market funds at an accelerated pace heading into and during a recession as investors shy away from riskier assets. On a more positive note, this also means there is a significant amount of dry powder on the sidelines. 

The bottom line is that while consumer spending isn’t looking fantastic, that doesn’t necessarily translate into a market slump.

Opportunities in Big Data

Instead of looking towards retailers this holiday season, a better gift for your portfolios may be in big data. While consumer-oriented companies face headwinds, the pressure on the public and private sector to harness the power of big data and Artificial Intelligence will continue. Palantir (PLTR) and MongoDB (MDB) are two companies benefiting from the big data trend. 

Palantir is still in the early stages of its growth potential with room for further market penetration but comes with higher volatility given its 2.7 beta. It reported strong Q3 earnings with a 34% year-over-year growth in customers. The company has followed a unique strategy of pursuing the biggest customers in specific industries and tackling their most complex challenges to facilitate market penetration. It offers unique software platforms that enable organizations to integrate, manage and secure their data, which are sought after by large corporations and government agencies for defense and intelligence purposes. Unfortunately for our collective sanity, today’s geopolitical realities are a significant tailwind– lemonade out of lemons.

MongoDB provides an open-source NoSQL database, for which it holds patents. The company generates revenue through a subscription-based model and its technology allows both structured and unstructured data storage and can efficiently integrate novel data schemes. The company has grown at a compound annual growth rate of over 40% for the past five years. It recently reported revenue for its second quarter of fiscal 2024 that exceeded the upper limit of management’s guidance range. Non-GAAP EPS also exceeded management’s guidance by a considerable margin. A significant portion of revenues continues to come from recurring subscriptions, indicating strong customer satisfaction. The ever-increasing demand for big data solutions and cloud-based services provides powerful tailwinds for growth. Shares gained nearly 30% after the company reported in June but pulled back during the market downturn and have recently moved above their 50-day moving average.

This year the savvy Santa may be more focused on opportunities in big data and AI than on boxes under the tree.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Lenore Elle Hawkins

Lenore Elle Hawkins has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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