Seeing Green on 'Black Friday'

Economists debate the outlook for holiday sales but traders aren't worried about much these days.
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Investors are probably more worried about their Thanksgiving travel plans than much of anything else these days. But if they had to pick their biggest near-term concern, it would probably be retail sales, with "Black Friday" looming.

"The concern is there about the holiday sales season, but it's just being ignored, like we're ignoring the rise in oil," says Randy Diamond, trader at Miller Tabak. "Everyone is ignoring everything. Nothing is moving the market either way."

Apart from

Google

(GOOG) - Get Report

,

Apple

(AAPL) - Get Report

and

Boeing

(BA) - Get Report

, which soared to all-time highs Tuesday, the stock market was relatively quiet. Major averages posted modest gains Tuesday even as oil shot up past $60 per barrel, closing up 2.3% at $60.17 per barrel.

Investors drove up Google's shares 3% to $509.65 on the theory the company will continue to grow based on the potential for its online advertising strategy. Shares of other Internet stocks, such as

Yahoo!

(YHOO)

and

eBay

(EBAY) - Get Report

, also added more than 1.5%.

Boeing's shares surged 2.2% to $91.10 on news that the company inked a deal with Korean Air to deliver 25 airplanes. Apple rose 2.5% to $88.60 amid optimism about holiday iPod sales.

Otherwise, the three major averages flopped around most of the day. The

Dow Jones Industrial Average

closed up a fraction at 12,321.59, while the

S&P 500

closed up 0.2% at 1402.81, and the

Nasdaq Composite

finished the day up 0.1% to close at 2454.84.

During this pre-holiday torpor, traders and economists are debating whether or not the holiday-sales season will be strong. Are consumers tightening the purse strings because their homes are losing value? Or are they spending more because wages and personal income are rising?

The usual surveys of actual consumers do not reveal much. As noted by

RealMoney.com

contributor Frank Curzio, last week's Gallup poll shows higher-than-expected spending is at hand, while Monday's Conference Board poll shows consumers expect to spend less than last year. The National Retail Federation predicts a 5% increase in retail sales from one year ago.

Moving on, the debate about the consumer focuses on whether income and wages drive spending, or home-equity extraction makes people go out and shop. To look at income and wages suggests a strong holiday season. The labor market is tight -- with unemployment at 4.4% -- and wage growth is running at a strong 7.6% year-over-year pace.

However, everyone, including the

Federal Reserve

, is worried about huge declines in home prices and the spillover effect that adjustable-rate mortgages will have on the consumer's pocketbook.

The damage will be limited, writes Torsten Slok, economist at Deutsche Bank, adding that it is the subprime borrowers who will feel most of the pain, and even they aren't likely to quit spending.

"With ARMs making up only 20% of the total outstanding single-family mortgages, overall consumer finances remain fairly well protected against increases in mortgage rates," he writes. The ARM resets add up to about $13 billion in 2006 mortgage payments and $18 billion in 2007, he writes. This is "a very small amount compared to annual consumer spending of around $9 trillion."

The aggregate impact of the ARM resets will account for less than 0.2% of total consumer spending, according to Slok, who adds that low long-term interest rates still provide options for homeowners to switch into longer-term fixed rate mortgages with (for some) lower monthly payments.

But the ARM data belie a different kind of problem for the economy: that "income distribution has become more uneven in recent years, suggesting that low-income households account for a smaller share of total consumer spending than they used to," he writes. Income directed to the wealthiest 20% of the U.S. has risen from 43% in 1973 to over 50% in 2005, while the poorest 20% of the U.S. received 3.4% of the income pie in 2005, down from 4.1% in 1970.

That said, the impact of higher mortgage rates on low-income families' spending is also likely to be minimal. The increase in ARM resets makes up only 1% of this group's total consumption.

So as long as the labor market remains strong, U.S. consumers of all stripes are likely to keep opening their wallets.

Furthermore, if consumers were using home-equity extraction to boost their spending habits, consumer spending should have been growing between 10% and 12% in each of the past three years, adjusted for inflation, according to Citigroup economist Steven Wieting. Instead, spending rose about 4%, in inflation-adjusted terms, during those years. Economists say much of the money went to investments like home improvements, college tuition or to pay off other debt.

"We believe job growth and wages play a much larger role in supporting consumer spending," writes Tobias Levkovich, chief U.S. equity strategist at Citigroup, defending the bank's decision to put an overweight rating on the retail industry group last week.

Retail stocks' performance show the market is discounting a strong holiday season, despite slower-than-expected retail sales in September and October. The S&P Retail Index was up 0.1% Tuesday and has registered a 16.2% return since the start of September. From its July 18 low, the index has returned 21.7%, and year to date it has returned 10.8%.

So while this holiday season is unlikely to top last year's 8% year-over-year growth rate, it is expected to deliver 6% year-over-year growth, which is hardly poor, says John Lonski, chief economist at Moody's Investors Service. For the 2004 holiday season, retail sales were growing at a 7% pace vs. 3.2% in 2003 and 3.3% in 2002.

Lonski measures holiday sales as growth in sales of general merchandise, apparel, electronics, restaurants and nonstore retail sales excluding home heating fuel for November, December and January. He includes January because of sales, exchanges and gift card purchases.

In sum, economists and the bond market can ruminate on the possibility of recession next year from Thanksgiving through Christmas, but this holiday shopping season is unlikely to be the red flag.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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