Merry Christmas and Happy New Year!

Thinking about Christmas may be a bit early for you, but not for retailers. Executives of all businesses that depend on consumer spending are deep in preparation for this holiday season. These executives are evaluating the prospects of consumer spending based on their financial assessment of households. Hotels and restaurants are wrestling with decisions to increase staffing, room and menu pricing, and marketing in preparation for the holidays. Nearly every industry that depends on consumer spending is laser-focused on the financial health and spending habits of consumers to determine if this holiday will be a glorious season of sales, a bust, or somewhere in between.  

Their preparation and accurate assessments will be key to their financial success. Should retailers underestimate consumer spending, they may not have enough inventory to meet demand and miss a terrific opportunity. A worst-case scenario is building up inventory based on an overly optimistic forecast and being stuck with excess inventory that declines in value on January 1.  

So, let's put ourselves into their shoes on what they are looking at and what conclusions they may be deriving. 

The first is the overall financial health of consumers and households. What must be the most encouraging data is more people are working now in the history of this country. More important than having a job is having discretionary spending or money left over to buy Christmas presents. Household savings soared from 2020 to 2021 to the highest levels in recorded history due to the combination of 40-year low mortgage interest rates and trillions in government subsidies. Many people used the windfall of income and government subsidies to pay down debt improving households' ability to save. 

Consumers were able to buy homes with mortgage rates as low as 2.5% fixed for 30 years or reduce the cost of their current mortgage by 50% with a refinance loan. In both cases, their largest personal expense has been reduced and guaranteed not to increase for 30 years.   

Rising home prices were a bonus to what may be a once in our lifetime opportunity to secure low single-digit mortgage rates. The low rates increased the number of qualified buyers, which increased demand resulting in rising home prices. The increase in home values has added to homeowner's equity, improving one's "wealth perspective" that adds to one's willingness to spend. Good news for retailers.

The financial strength of consumers is also evident in the continued home sales activity in 2023. According to U.S. Census Bureau, new home sales in the United States decreased to 697 thousand units in June from 715 thousand units in May of 2023 but still a strong recovery from last year when home sales and new mortgage applications plummeted due to the Federal Reserve rapid rate increase campaign. 

Speaking of mortgage applications, Mortgage Bankers Association of America reported that in the U.S., mortgage applications declined 1.8% in the week ended July 21. This is the first drop in three weeks and again a strong recovery from last year when refinance activity was reported to have declined by as much as 90% in many regions of the country.  

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) was unchanged at 6.87%, according to the Mortgage Bankers Association of America report.

A stable housing market is a strong indication that consumers have savings, home equity, and income. All good news for the prospects that consumers will be ready to buy.

Another bonus to households is the strong rebound of the stock market. Even those that are not individually invested in the stock market, a large majority of consumers participate in their employer's 401k plan that has growth funds invested in the stock market. More on the stock market later.

Probably the hardest factor is determining consumer's feel and the amount they may spend this holiday season. Just because consumers have savings, home equity, and income, they may not spend to the level retailers' project due to consumers' insecurity about their future financial situation or the economy.

A good data source to assess the temperament of consumers is the University of Michigan's Consumer Sentiment Index. Last month they reported that sentiment had been steadily improving since bottoming in late 2022, even though the Federal Reserve was only halfway through its interest rate increase campaign.

WHAT DOES IT MEAN TO ME?

Understandably it is difficult to think about Christmas while it's sunny and hot outside. In Roseville, California, it's been over 100 degrees for four weeks, and even longer in San Antonio. However, this time will pass, and soon enough, the weather will change, and you will see Christmas decorations in stores. Holiday sales are important for stock market investors as good holiday sales provide a "tailwind" to market momentum. Good holiday retail sales lend to positive January earning reports that sometimes provide an initial first-year boost.

The stock market has experienced a solid rebound from last year's selloff. All the major indices have positive returns YTD, with the small and mid-cap indices trailing well below the S&P 500 and NASDAQ. We view the small and mid-cap indices as potential buying opportunities should the economy and stock market continue their positive trend.

Focusing on the technical aspect of the S&P 500, it remains in a solid positive trend with the favorable stacking of the index above its 20-day moving average (DMA), which is above the 50 DMA and above its 200 DMA. What this means is the daily increase of the S&P 500 is rising faster than the average of the past 20 days. The 20 DMA is rising faster than the average of the past 50 days, which is also rising faster than the average of the past 200 days. The index is steadily picking up speed, which indicates institutional investors are buying more stocks than they are selling. Institutional investors (banks, hedge funds, private equity, etc.) are the most informed investment group, and their buying activity represents their views of the economy and prospects for profits.

So, it would seem the managers and buyers may be stocking up their inventory in preparation for what may be a banner holiday season. Stable and improving the financial status of consumers and households is the foundation of good economies for all countries. Unique in America is consumer spending represents 66% of the nation's GDP, and why it is important to monitor the financial health of households.

Let us know if you have any questions about this Weekly Brief or your personal financial planning. We welcome the opportunity to be of service to you and your family.