VERSACE: Keep your financial seat belt fastened
Anyone looking at the chart of the S&P 500 over the past few weeks and thinking to themselves “Holy cow” or “Boy, that is a roller coaster for the brave of heart.”
Both reactions are correct as there has been a nonstop transition over the past several months from one concern to another. During the summer, it was a double-dip domestic recession that weighed on investors as well as the debt ceiling and deficit reduction. As those concerns subsided in August and September, renewed concern over Europe and sovereign debt emerged.
Despite some progress in Greece and Italy, fears of a contagion across Europe persist as does the view that Europe likely will see a recession in 2012, which will hamper global growth and the domestic recovery. Adding fuel to that fire in the past few days was the reported contraction in Germany’s manufacturing economy in October and news that China’s factory sector shrank the most in 32 months in November.
Renewed concerns over a global slowdown coupled with the stock market bracing for what looks like extended gridlock in Washington over the coming months and quarters led to a return of uncertainty in the marketplace, which pressured stock market indexes this week. During the first part of an abbreviated trading week because of the Thanksgiving holiday, the major market indexes gave back much of the gains achieved in October; in particular, the S&P 500 fell more than 120 points since its recent peak on Oct. 27 and as such now has a year-to-date return of -7 percent.
While the economic storm clouds brew over Europe, data out over the past few weeks points to a firmer U.S. manufacturing base even though housing continues to lag. Weekly jobless claims have trended lower, touching 388,000 last week. Despite that “progress,” meaningful job creation has yet to emerge.
Just because fewer people are claiming jobless benefits does not necessarily mean they are getting jobs. Employment data can be tricky during this time of year because seasonal hiring needs can inflate temporary hirings in the short term. While the November and December employment reports bear watching to see whether the negative trends on disposable income continue, we will have to wait until early 2012 to get a handle on what real job creation looks like on an ongoing basis. As noted by Federal Reserve Chairman Ben S. Bernanke this week, despite signs that the domestic economy is picking up, “The pace of progress is likely to be frustratingly slow.”
For many, this is a day filled with post-turkey and stuffing recovery. For others, it is a day to brave the malls as Black Friday kicks off the countdown to Christmas. Over the weekend and all over the news channels on Monday, we will hear all sorts of initial takes on what pundits think about how Black Friday will translate in terms of holiday spending this year.
A recent Gallup poll points to consumers spending the same amount on Christmas gifts this year as they did in 2010, which suggests an average of $715 or so. As a frame of reference, this is 21 percent less than a consumer spent on average in 2008. Data from the National Retail Federation reveals a modest drop in average holiday spending this year compared with last year.
As we get more data in coming weeks, we’ll have a better sense as to how far consumers are willing to open their wallets and swipe their credit or debit cards this holiday season. No matter which of the two forecasts you favor, it appears it will be “the Cash Strapped Consumer” we see this Christmas. Accompanying this consumer will be more than a hint of additional volatility in the coming weeks.
Stay tuned, and from me and my family to you and yours, Happy Thanksgiving!
• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at email@example.com. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.