Consumers Hesitant Ahead of Holiday Season
It appears that U.S. consumers are approaching the holiday season with some reluctance.
This hesitation is influenced by worries about a weakening job market and ongoing inflation.
Interestingly, despite a recent uptick in Target Corp.’s stock, it had faced its most challenging week since April, as earnings revealed that customers are cutting back on non-essential items like clothing and home goods. In the same vein, Home Depot saw a dip of more than 5% in just five days, its worst performance since March. This decline followed the company’s lowered outlook, which points to homeowners delaying significant purchases amidst financial strain.
Even Walmart, with its solid profits and optimistic projections, has shared some economic warnings. While its stock did perform well last week, the gains seemed largely reliant on low-cost grocery shoppers and mid-tier customers, both suggesting a level of consumer caution.
Recent reports, including those from Gap Inc., Ross Stores, and TJX, indicate that many shoppers are rethinking discretionary spending and focusing more on essentials. More concerning is the shift among wealthy Americans, who have been key in supporting the economy this year but are starting to watch their spending more carefully. This sentiment is echoed by the University of Michigan’s Consumer Sentiment Index, which has dipped to near-record lows this month.
The report notes, “Consumers remain dissatisfied with persistently high prices and declining incomes.”
This situation complicates matters for an economy reliant on consumer spending, especially since lingering inflation could deter the Federal Reserve from making interest rate cuts, even as labor market signs become troubling.
“Affordability is a significant concern during the vital holiday period, when profit growth becomes crucial,” said Timothy Chubb, chief investment officer at Girard, part of Univest Wealth. He cautions that revenue growth for Corporate America may slow, squeezing margins as consumer outlook declines alongside the economic and labor market challenges.
Retail stocks have been trailing the broader market for years, particularly as investments have shifted towards technology and AI. Looking ahead to 2025, things might worsen for lower-income consumers grappling with inflation and job market issues.
The S&P Retail Select Industry Index, which includes names like Macy’s, Costco, and Dollar Tree, has remained flat for the year. In contrast, Target has decreased by 35%, Bath & Body Works by 62%, and CarMax by 57%. Conversely, low-cost retailers like Dollar Tree and Dollar General, alongside online platforms such as eBay and ThreadUp, have seen increases.
This week is crucial as several retailers, including Best Buy, Dick’s Sporting Goods, and brands like Abercrombie & Fitch and Urban Outfitters, will release their earnings reports. A positive outlook here could provide U.S. stocks with a much-needed boost as the year approaches its end, especially since the S&P 500 index has already fallen 3.5% this month, hinting at the worst November since 2008.
If Walmart retains its strong position, investors might face challenges. Its performance last week was impressive, with shares rising 2.8%, spurred by spending from higher-income households that typically shop at upscale retailers.
“Higher-income households are choosing to shop with us more frequently,” commented Doug McMillon, CEO of Walmart. “While middle-income households are faring decently, lower-income groups are feeling the squeeze.”
Off-price retailers like TJX and Ross Stores saw positive results as well, with quarterly sales exceeding expectations, suggesting growth driven by value-seeking consumers this holiday season.
Macy’s much-anticipated retail earnings report will come out on December 3, potentially giving investors a positive outlook. However, inflation continues to raise prices on essential goods, leading to overstocked stores and pressure on retailers to lower prices, impacting profits.
Bloomberg Intelligence has indicated that while inflation may be cooling, price pressures still pose considerable obstacles for both discretionary items and essential consumer goods. This context makes the perspectives of retail executives on promotions and the holiday season particularly vital.
It’s understandable to approach the situation with caution; the combined effects of surging inflation and economic uncertainty are certainly affecting holiday spending habits. As retailers caution frugal consumers, fourth-quarter sales—traditionally the busiest time of the year—might not provide the typical lifeline.
Yet, there are reasons to remain optimistic. Holiday spending is projected to exceed $1 trillion this year, marking a record, according to the National Retail Federation.
However, data from Michelle Weaver, a strategist at Morgan Stanley, suggests that this year’s shopping season might be less robust than last year’s, largely due to higher prices. Many consumers are reconsidering their holiday budgets, with 38% intending to stick to their current spending, while 30% aim to increase and 23% plan to spend less. Consequently, spending growth is expected to be a modest 6% year-on-year, notably down from the 14% increase seen in 2024.
The holiday season is here, and historically, Thanksgiving week brings volatility in consumer stocks.
“While the Grinch might not steal Christmas from retailers and shoppers, effective holiday promotions and discounts become essential for driving holiday spending and supporting revenue growth as we advance toward the year’s close,” remarked Mary Ann Bartels, chief investment strategist at Sanctuary Wealth.
