FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 12, 2019

IN THIS ISSUE:

1. Record Holiday Sales Expected, Driven by Online Shopping

2. US Worker Productivity Falls First Time in Four Years

3. Fed: Business Loan Demand Weakened in Third Quarter

4. Corporate Profits Are Worse Than the Markets Think

Overview

Holiday retail sales are expected to set a new record this year, growing by apprx. 4% over last year to at least $728 billion. Online sales are expected to jump over 14% to more than $143 billion, also a new record. Retailers believe this is because more people are working than ever, and consumers are in the best financial shape in years. This will be interesting to watch since the holiday shopping season between Thanksgiving and Christmas is six days shorter this year.

Unfortunately, not all the news of late has been good. US worker productivity fell in the 3Q for the first time in four years. The Fed reported last week that business loan demand has weakened due to continued low capital expenditures. And finally, while stock indexes hit new record highs last week, corporate profits are still about where they were four years ago. If you are an investor, you definitely want to know about this.

Record Holiday Sales Expected, Driven by Online Shopping

While the US economy slowed to a 1.9% annual rate in the 3Q, down from 2.0% and 3.1% in the 2Q and 1Q, respectively, retailers are gearing up for a record year for holiday sales. The National Retail Federation has forecast total holiday retail sales will grow by 3.8% to 4.2% this year, excluding automobiles, gasoline and restaurants. That equates to sales of between $728 billion and $731 billion, compared to almost $706 billion in 2018.

This rosy holiday spending forecast comes despite the fact that there are six fewer shopping days between Thanksgiving and Christmas this year, making it the shortest possible holiday shopping season. Thanksgiving is on November 28 this year versus November 22 last year. Translated: You better get busy!

While total holiday spending is expected to grow by about 4%, as noted above, digital (online) spending during November and December is expected to explode by over 14% from a year ago and reach $143.7 billion, according to a new study by Adobe Analytics, which tracks transactions for 80 of the top 100 US Internet retailers including Walmart and Amazon.

Cyber Monday sales alone are expected to hit $9.4 billion, up nearly 19% from last year, Adobe said. Black Friday sales online are expected to be $7.5 billion, up 20.3%. Thanksgiving Day sales on the Internet are forecast to surge 19.5%, to $4.4 billion, it said.

Because of the compressed shopping season, Adobe expects online sales to top $1 billion each day in November and December up until Christmas Day. “We fully expect [retailers] to be driving discounts and sales much earlier and much more consistently throughout the season,” said a spokesman for Adobe.

Beyond deep discounts, Adobe says companies will try to lure shoppers with expedited delivery options, curbside pickup, new loyalty program perks and events in stores. Chinese e-commerce giant Alibaba’s “11.11 Global Shopping Festival” which began on November 11 could also spark US-based retailers to offer deals that align with the shopping extravaganza.

The question is, how will the trade tariffs affect holiday spending? The answer is, we don’t yet know. The effect of tariffs on holiday spending – either directly or through consumer confidence – remains to be seen. Some holiday merchandise – including apparel, footwear and televisions – is subject to new tariffs that took effect September 1, and other products will not have the tariffs applied until December 15.

Retailers are using a myriad of mitigation tactics to limit the impact on consumers, and the outcome will ultimately vary by company and product. Small businesses, in particular, have already been forced to raise prices. Nonetheless, 79% of consumers surveyed for the National Retail Federation (NRF) in September were concerned that tariffs will cause prices to rise, potentially affecting their approach to shopping.

The NRF says it considered the tariffs, as well as all the other factors it looks at,  in its forecast for record holiday sales this year. At the end of its analysis, the NFR concluded that US consumers are in good financial shape this year. “Job growth and higher wages mean there’s more money in families’ pockets, so we see both the willingness and ability to spend this holiday season,” it said.

Finally, I should note that tariffs on Chinese electronics and other imports don’t go into effect until December 15, so if you’re in the market for those products be sure to purchase them before then. Try to have fun shopping!

Now we’ll turn our attention to some economic data that is not so positive.

US Worker Productivity Falls First Time in Four Years

American workers were less efficient in the July-September quarter, pushing down productivity for the first time since late 2015. The Labor Department reported last week that productivity, a measure of economic output for each hour worked, fell 0.3% in the 3Q. The drop comes after two quarters of healthy gains.

With economic growth slowing, in part because the stimulus from Trump administration tax cuts is fading, many economists worry that worker productivity will continue to fall. As I discussed herein last week, most economists also believe that the Trump administration’s trade war with China has discouraged businesses from investing more in productivity-enhancing tools such as computers and machinery, offsetting the benefits from the 2017 corporate tax cut.

Despite the decline of 0.3% in the 3Q, US productivity rose 1.4% over the past 12 months. The problem is, that’s about half the historical average. It’s the key reason the overall economy has expanded more slowly than in past expansions.

Greater productivity is an important ingredient in raising living standards. Among other things, it enables companies to lift worker pay without raising prices on customers. Most economists expect the US economy to grow at 2% or less in 2020. If so, that suggests productivity will continue to decline.

Fed: Business Loan Demand Weakened in Third Quarter

Demand for business loans weakened in the third quarter as bank customers dialed back their plans for new plant and equipment investment, according to a Federal Reserve survey released last week.

Nearly a third of the senior bank loan officers surveyed by the Fed in October said demand for business loans was weaker in the 3Q for large and middle-market firms – those with annual sales of $50 million or more. About 20% saw lower demand from smaller firms.

Most respondents said lending standards for business loans were largely unchanged. Among respondents who saw weaker demand, almost two-thirds (63.6%) said that lower business investment was a somewhat important factor, while 22.7% said it was very important.

By contrast, demand strengthened for most categories of consumer loans, including credit cards, auto loans and mortgages. Banks tightened their standards for credit card loans, and a significant share said they were less likely than a year ago to approve new credit card loans for borrowers with a credit score of 620 or lower, citing a more uncertain economic outlook and a growing concern about borrowers’ ability to make payments on their loans.

The survey results followed data released by the Commerce Department last week showing consumer spending and housing investment helped bolster US economic growth in the 3Q, offsetting a drop in business investment.

Corporate Profits Are Worse Than the Markets Think

With the major stock indexes hitting new record highs last week, most analysts agree that stocks are overvalued. Stock prices are, after all, driven in large part by corporate profits, and after-tax corporate profits have been mostly sideways since 2015 as you can see below. This raises the question of whether the current record stock prices are justified.

As you can see above, the last time this metric got so out or whack was in 1999-2000, and we all know how that ended. The S&P 500 lost 49% in the 2000-2002 bear market. Most bullish analysts who are aware of the current disparity between prices and after-tax profits argue that this time is different because interest rates are near historical lows.

Others point to significant changes in corporate accounting rules and unprecedented share buybacks in recent years to justify the current disparity. I would caution, however, that both the accounting changes and the share buybacks are artificial and finite in nature.

While no one knows how long this disparity can continue, I would argue that most investors are not aware of  this huge gap between after-tax profits and the latest record high prices.

This may be an ideal time to consider diversifying with some of the alternative investments we offer at Halbert Wealth Management – including those that have the ability to move to the safety of cash if need be and/or short the market should we enter a bearish trend. We also have several investment strategies that do not invest in equities at all.

If you are concerned about stock market risks, please call one of our experienced, non-commission Investment Consultants at 800-348-3601.

Finally, if you haven’t already, you really should read my Blog last week, entitled Democrat’s “Wealth Tax” – A Giant Invasion of Privacy. I doubt you’ll read this take anywhere else. If you don’t already subscribe to my Blog, you can sign up here. It’s free, of course.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

Holiday Sales Expected to Hit Record

Worker Productivity Falls First Time in Four Years

Corporate Profit Outlook Getting Weaker

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.