EN United States
Macroeconomic & Geopolitical

Will Christmas Save The World?

6 December 2019 - 3 min read

So far this year, so good. The headlines may describe a world coming unglued, from Santiago to Hong Kong and trade wars to Brexit, but the average American’s urge to spend remains one of the strongest forces known to nature.

Christians look to the birth of Jesus as a sign that God has not given up on us yet. More prosaically, investors stare at Christmas retail data for evidence that this economic cycle still has enough steam to carry through next year. Spending that accounts for more than two-thirds of an economy that accounts for a quarter of global activity can’t save the world economy on its own, but the world economy cannot be saved without it. 

So far this year, so good. The headlines may describe a world coming unglued, from Santiago to Hong Kong and trade wars to Brexit, but the average American’s urge to spend remains one of the strongest forces known to nature. 

Nearly 190 million people went shopping in the five days that bridge Thanksgiving and Cyber Monday, according to the National Retail Federation. That’s a new record and 14% more than last year. These shoppers spent $362 on holiday items, which is up 16%. Meanwhile, a Gallup survey suggests this may be one of the best seasons of the decade with Americans expecting to spend $846 on gifts, up $52 over last year. 

A shorter shopping season and early winter storms could undercut some of this initial holiday optimism. But none of these variables should affect shoppers on laptops in their bunny slippers. By one reckoning, digital sales were up 20% on Black Friday, and the average order was up 6% to $168. Malls and Main Streets continue to suffer from the secular shift to online sales, but overall spending growth looks as healthy as ever. 

None of this is immutable. Last week’s data on the service sector was weak and could signal some trouble ahead, but Friday’s non-farm payroll report exceeded expectations and confirmed other good news on wages, unemployment and sentiment. 

AVERAGE HOURLY EARNINGS GROWTH 

Source: Haver, Bloomberg. As of November 30, 2019.

CONSUMER CONFIDENCE

Source: Bloomberg. As of November 30, 2019.

Even Europe’s gloom may be dissipating slowly as its consumer confidence holds steady, unemployment numbers fall and wages rise. Spending prospects already look brighter next year as rising savings rates suggest there is pent-up demand as long as sentiment persists. 

Recognition for extending the cycle goes primarily to the world’s largest central banks. American households have benefited directly from lower mortgage and credit costs. Further accommodation from the European Central Bank, the Bank of Japan and the People’s Bank of China have underpinned demand and helped to postpone many recession forecasts beyond next year.

The lesson for those of us who are paid to worry about markets could be that we spend too much time focusing on the political noise. We may confuse anger at a system that many believe is rigged against them with comparative financial security from one year to the next. 

Yes, median household incomes have stagnated for decades and 27% of American families cannot cover a $400 emergency. But what they sense in the current jobs market makes them comfortable enough for a slightly more lavish holiday celebration this year.

U.S. HOUSEHOLD BALANCE SHEETS

Source: Bloomberg. As of September 30, 2019.

That bureaucratic bickering, especially as it plays out in tariffs, seems to have had a much greater influence on corporate decisions and plans for fixed asset investment. Tariff threats and political uncertainty make it far more difficult to plan. How much will my imported parts cost? Can my exports still sell at a competitive price? I was already worried about China, but do I now need to think about Europe, Brazil, Argentina and even Mexico?

“The lesson for those of us who are paid to worry about markets could be that we spend too much time focusing on the political noise. We may confuse anger at a system that many believe is rigged against them with comparative financial security from one year to the next.”

Then, there is an increasingly boisterous election campaign. Will a new Democratic president bring new regulations for my industry? Shouldn’t I just hold off on that new factory for another year? Will impeachment proceedings have any impact at all?

Perhaps the biggest economic uncertainty for 2020 remains whether mounting political risks will extend this downturn in capital spending and if it will finally start to chip away at U.S. consumer confidence.

NONRESIDENTIAL FIXED INVESTMENT GROWTH

Source: Bloomberg. As of September 30, 2019.

Logically, if companies don’t build factories, they don’t need as many workers. But that certainly hasn’t been the case so far. It’s possible that a workforce that is increasingly tilted toward services is less sensitive to trends in capital spending. It’s possible that strong consumer demand will drive capital spending rather than the other way around. Companies can’t delay investments indefinitely and will just have to live with tariff and regulatory uncertainty.

And as long as rates are low and confidence remains solid, perhaps we should focus our worries about this extended cycle elsewhere: debts without covenants, an unexpected whiff of inflation or oil prices that still depend on risk in unpredictable countries.

Over the next three weeks, watch the regular retail sales reports, the home delivery volumes and, yes, the weather. But pause also for a moment to celebrate U.S. consumers as they celebrate the coming holiday.

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

19-1030163

X

We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.