Bonus Message of the Week: Why We Remain Sanguine (for now)

Are you wondering why, amid our constant warnings of rough patches and ultimate trade war casualties, we remain relatively sanguine, and, thus, growthy in our equity allocation?

Well, as we've stated along the way, our assessment of conditions, per our proprietary macro index, says that presently odds of a near-term recession (what a true bear market needs) remain low.

The following from Bloomberg this morning reflects what our assessment says about the prospects for the coming holiday season (nothing smells of recession there, but it won't stave off a rough patch or two, or three), as well as our concerns over the longer-term risks the trade war presents:

Holiday sales are set to exceed $1.1 trillion

2018 holiday retail sales (excluding motor vehicles and gasoline) are expected to grow between 5% and 5.6% year-over-year (YoY) between November and January, exceeding a total of $1.1 trillion, according to Deloitte’s annual retail holiday sales forecast.

This represents a likely acceleration from last year’s growth of 5% YoY and is also a more positive outlook than other estimates of 4% YoY. The e-commerce sales total for this holiday season is expected to be somewhere between $128 billion and $134 billion.

The cause of this growth is due primarily to positive economic factors:

• Strong income growth. Consumers are expected to see a disposable income growth rate in the 5% to 5.4% range this year, according to Deloitte’s US economic forecaster Daniel Bachman. The prospect of growing wages is likely to make shoppers feel much more comfortable with spending more on holiday purchases.

• Solid labor market. The US is currently adding around 200,000 jobs per month and the unemployment rate is at a strong 3.9%. With steady employment, consumers are likely to have more disposable income on hand to spend on gifts during the holidays.

• High consumer confidence. The Conference Board’s Consumer Confidence Index hit 133.4 in August, marking its highest point since October 2000 and 11% growth from the August 2017 level, according to Internet Retailer. This index measures consumer sentiment on current economic conditions and how they feel things will go in the next six months, and the fact that it’s so high means that consumers are optimistic. If shoppers this holiday season feel secure in their future economic status, they may feel more confident splurging on purchases.

While a strong US economy is currently keeping prospects rosy for retailers, the deteriorating trade situation between China and the US looms.President Trump recently announced that he will be levying a new 10% tariff on approximately $200 billion in Chinese imports, and that this duty will take effect on September 24 before rising to 25% at the end of the year.

Since many of the leading chain retailers such as Walmart and JCPenney have already imported their winter items, this means that tariff action may not have as strong an effect on the holiday season as was previously suspected. However, this only means that the tariffs will have their effect in the spring if the two countries’ governments can’t work something out.

This prospect has already led to an expected deceleration in US economic growth from an annualized rate of 4.2% in August 2018 to 2.3% in 2019, according to analysis by Moody’s.