3 Reasons Retailers Are Sweating This Christmas

By TradeSmith Research Team

Listen to this post
Do you hear it?

The crunch of snow and jingle of sleigh bells, the sound of credit cards swiping…

Of children fawning over the latest toys…

Of throngs of shoppers rushing into department stores, holiday shopping lists in hand.

Or, wait… Does it sound different this year?

Do we instead hear the exasperated, despondent gasps at the sight of a credit card statement? Of overdrawn bank accounts? Of the realization that this year’s Christmas tree might have to be a foot or two shorter?

Yes, spending season is here. The peak of it today: Black Friday. But the American consumer is not in as great a position to spend as they were in years before.

My first essay for TradeSmith Daily was about the worsening conditions of the American consumer as we head into the biggest spending season of the year, and how that could impact the earnings of several consumer discretionary companies.

Today, either I’ll be proven wrong and consumers show up for another huge holiday… Or it’ll be a lighter Christmas, and we should be wary of buying stocks that depend on a devil-may-care consumer.

To get an idea, let’s check in on the latest consumer numbers, to understand if we should hedge against not-so-merry holiday earnings…

3 Signs of a Strained Consumer

Sign No. 1: Consumers expect higher inflation.

Per data from the University of Michigan, consumers aren’t convinced the inflation fight is over. In November, consumer expectations for the inflation rate one year from now rose to 4.5%, against Wall Street’s forecast of 4.4%.

Source: TradingEconomics

This is a tricky sign to unpack, because consumers and investors who fear higher inflation can do one of two things:

  1. Spend more now before prices rise more.
  2. Or save more now to take advantage of what are still inflation-beating Treasury yields.
Option 1 would make for a great holiday season… while option 2 would stifle it.

As to what they’ll decide, that comes down to the average American’s wealth situation. And as we’ve covered before, it’s not looking as great as it could.

Sign No. 2: Building credit stress.

The most worrying trifecta of charts for the U.S. consumer are as follows:

First, the Personal Savings Rate is at its lowest point in a year, and on a longer time frame, at one of the lowest points since the Great Recession:

Second, the delinquency rate on credit cards, while still relatively low, continues to rise at the fastest pace since the Great Recession:

And third, credit card balances are making new high after new high:

These three factors do not make for a healthy consumer. They reflect the image of one saddled with debt, eating away at their savings, and at the worst, failing to pay their bills.

We see evidence of consumers’ spending cutbacks already, with retail sales falling 0.1% in October.

My theory on this is that the resumption of federal student loan payments has hit households in a bigger way than many expected. Consumers got used to not having to pay a few hundred bucks toward student loans for nearly three years. That obligation has come back with a shock, and it’s making folks reconsider their spending habits.

But there’s one final sign that should keep us wary of a slow holiday spending season…

Sign No. 3: Layoffs, layoffs, layoffs.

2022 was the year of the layoff. As the excesses of the 2021 bubble unwound and interest rates began to surge, all the companies that “hired up” and saw only an infinite runway of growth before them got quickly blindsided.

However, until now, the unemployment rate hasn’t climbed too much. It’s currently at 3.9%, the highest since February 2022, but still quite low.

A common explanation for this is that the jobs lost in 2022 largely affected remote, high-tech workers who had the resumes to easily find a job elsewhere. Per research from Mondo, there were 26 high-profile public layoffs of a substantial amount of a company’s workforce. And the companies on the list — Amazon, Meta, Twitter, Outbrain, Taboola, Snapchat, among others — fit this mold.

But according to the same research report, there have been more than three times as many mass layoffs of a similar caliber this year — 97 in total. And this year, we’re seeing layoffs in the tech space and elsewhere. Morgan Stanley, Shell, Geico, Nokia, and Anheuser-Busch make the list, alongside tech titans like Microsoft and Google, as well as smaller firms like Spotify and Zoom.

Companies are clamping down even more on expenses as interest rates rise and business loans get more expensive. That’s putting more people out of work — slowly, but surely. A higher unemployment number in the months ahead will certainly weigh on holiday spending, so this is something to keep an eye on.

How to Prepare

As always, at TradeSmith we preach taking defensive measures in any kind of market environment, especially uncertain ones like this.

The two major ones I’ve been preaching since I began writing to you are:

  • Buy only capital-efficient, dividend-paying companies that can withstand and even thrive in a difficult economy.
  • Learn to trade the ups and downs of the markets, taking profits and cutting losses quickly.
Following these tenets is sure to pay off in any kind of market, but especially one with a tenuous U.S. consumer.

We’ll keep an eye on the consumer data here for you in TradeSmith Daily, and especially on the consumer discretionary retail stocks that stand to gain or lose the most next earnings season.

To your health and wealth,

Michael Salvatore
Michael Salvatore
Editor, TradeSmith Daily