Planes, Trains, and Automobiles
For many people the movie, Planes, Trains, and Automobiles has become a tradition to watch during this time of year. This film stars Steve Martin as a high-strung marketing executive trying to get from New York City to his home and family in Chicago in time for the Thanksgiving holiday. During his travels he invariably keeps running into a goodhearted, but annoying, salesman played by John Candy. The duo endures a series of misadventures, but despite numerous setbacks is unwavering and committed to doing whatever it takes to make it home for the holiday, utilizing various modes of transportation, hence the title of the movie. This is very similar to saving for retirement – it may not be as smooth of a journey as you anticipate or hope for, but you need to remain steadfast and be able to adapt should you run into difficult situations.
The major U.S. stock market indices capped off a holiday-shortened week of gains with attention on a few key tailwinds. Peak inflation remains a theme in the markets as does the hope for a change in monetary policy from the Federal Reserve. Interest rates fell slightly and the yield curve remains largely inverted; an ominous sign for future economic growth. Oil prices declined on the week on the heels of lower expected demand due to slowing economic growth and speculation OPEC will increase production next month. It is worth noting that oil (and gasoline) prices have now fallen to roughly where they were at the beginning of the year. However, the Energy sector of the S&P 500 is higher by about 65% over the same time. Some of this can be explained by higher natural gas prices, but this illustrates the current dichotomy between energy prices and stock prices in the energy industry. Energy prices are based upon supply and demand while stock prices are based upon expected future cash flows. These are generally intertwined with energy company profits being dependent upon energy prices. We view this current disjunction as a sign that the stock market expects energy companies to remain profitable and energy prices to move higher. But in the meantime, lower energy prices should help ease some of the inflationary pressures and upcoming inflation data is likely to reflect this.
The peak holiday shopping season kicked off on Black Friday last week with consumer resilience and retail margins in focus. Households pinched by inflation and higher energy prices are expected to spend less than they have in the past. Bloomberg noted that seasonal sales are expected to fall 1.2% year over year on an inflation-adjusted basis; the first decline since 2009. Overall spending in nominal (not inflation-adjusted) terms is expected to rise 2.5% year-over-year, down from 8.6% last year. Online Black Friday sales were in-line with these projections as they came in 2.3% higher than a year ago but more consumers embraced flexible payment plans as they continue to deal with higher prices and inflation. Healthy numbers from online sales over the long Thanksgiving weekend may be a promising indicator of coming weeks.
Consumer spending is always watched closely by economists since it comprises over two-thirds of GDP. At this juncture, there is even greater emphasis on spending since it will provide insights on the effectiveness of the action taken this year by the Federal Reserve. If consumers are spending less because interest rates, and therefore the cost of borrowing, are higher then it would indicate action from the Fed has been effective. This would also signal that inflation could be easing. If consumers are buying fewer goods, it puts pressure on retailers to lower prices, helping reduce inflationary pressures. Early indications are that spending is strongest on marked down merchandise, which could hit retailer profits, though at the same time help draw down bloated inventories. Given uncertainty about current economic conditions, the markets may place greater emphasis on holiday sales than in years past, especially once we get past the upcoming inflation reports and Fed meeting in the middle of the month.
This week marks the beginning of a stretch of high frequency economic data apt to move markets and provide some volatility. It begins on Thursday when the Personal Consumption Expenditures (PCE) data is released, including the PCE Deflator which is the Fed’s preferred measure of inflation. Expectations are for an annual increase of 6.0%, still well above the Fed’s “comfort zone” of around 2% inflation. Friday brings the monthly jobs report which is being closely monitored by the Fed and economists since there is concern tighter monetary policy will lead to slowing economic conditions and eventually job losses. Conversely, if the labor market remains strong there is concern higher wages will continue to contribute to higher inflation. It is a bit of a no-win situation for the Fed right now and hence why many feel prospects for a “soft landing” are slim.
As we enter December, it is a reminder that time in running out for 2022. If you need to make adjustments to your retirement plan or portfolio prior to year-end, do not delay further. This is a year many of us would rather forget when it comes to the markets but is also a reminder that often times we need to deal with unexpected events and be able to adjust. Stay focused and committed to your goal, make adjustments if needed. For travelers, different modes of transportation may be used to arrive at a destination, just as there are different strategies that can help you reach your goals.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
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