EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated podcast on the day’s post courtesy of Google’s NotebookLM): November 18, 2024
A Solid October for Retail Sales & Upward Revisions
Giddy up Jingle-horse, retailers reported another better-than-expected month in October even as September’s sales numbers were revised sharply higher. An otherwise lackluster year for retailers is gaining some last-minute momentum just as Holiday Sales get underway in November and December.
The initially reported September increase of 0.4% was lifted to 0.8% in the revision. The 0.7% gain in September control group sales, a proxy for personal spending in the GDP report, was revised to a 1.2% surge. That makes September the strongest month of 2024 for core spending and notches the biggest monthly pop since January 2023.
On that basis, the scant 0.1% giveback in control group sales is not terribly disconcerting. (…)
This is the last retail sales report before the official start to the holiday shopping season. Our definition of holiday sales includes total retail sales less sales at auto dealers, gasoline stations and restaurants in November and December. We learned today that through October those categories are up 2.8% year-to-date.
We forecast holiday sales to increase 3.3% through year-end which, if realized, would be the smallest annual gain of the past five years. Today’s retail sales data place holiday sales growth almost perfectly on pace to reach our forecast.
There is a missing tailwind this year: sales momentum is as modest as it has been in several years. With already reported data for the first ten months of the year, we know that consumers are coming into this year’s holiday season in pretty average shape. Despite broader spending continuing at a robust clip, the retailers we include in our holiday sales measure have seen sales rise at a very slow pace. Since our forecast compares November and December sales to last year’s levels, the low base so far this year makes for lower year-ago comparisons.
We expect current conditions to allow for a decent holiday sales season for retailers, but we are still likely to see the slowest pace of annual sales growth since ahead of the pandemic, and we remain cautious on the prospects for spending in the new year. We will provide updates to our holiday sales estimates as the retail sales data come in and keep you apprised on how the holiday sales season evolves.
I don’t know how Wells Fargo can say there is only “modest sales momentum” unless one simplistically looks at nominal sales. Their own real sales metric shows real retail sales up 4.0% YoY.
My proxy for real sales deflates nominal sales using .35 x CPI-Durables + .65x CPI-Nondurables. A good way to test the proxy is to compare my real sales data with real consumer expenditures-Goods; the fit is almost perfect:
Here’s the close-up over the past 24 months:
2024 sales started soft after a strong 2023 finish but momentum has built up continuously since.
Wells Fargo is also way off saying that “consumers are coming into this year’s holiday season in pretty average shape”.
Aggregate weekly payrolls are up 5.3% YoY in October, up from 4.8% in July and way ahead of inflation (2.1%). They also have a reasonably high savings rate (4.6%) and debt service payments of 5.6%, at the low end of the historical range while interest rates are declining.
Revisions to September sales data were significant and will boost Q3 GDP:
- September headline retail sales: +0.8% vs +0.4% originally reported
- Ex-autos: +1.0% vs +0.5%.
- Control Group: +1.2% vs +0.7%.
BTW: (From Bank of America Institute)
On another positive note, by the last week of October, average card spending per household recovered in the states affected by hurricanes Helene and Milton by the last week of October, up 2% YoY after declining nearly 8% YoY during the third week of October. Meanwhile, spending growth was positive throughout the month for the rest of the United States.
When we look by category, spending on necessity goods such as gasoline has been weak over the last three months, reflecting recent deflation in this category. Additionally, spending on groceries has been modest, reflecting slowing inflation for food consumed at home.
It could be that the slowing of the pace of inflation has left more room in consumer budgets for discretionary services like restaurants, which has had three consecutive months of strengthening. This could also explain the growing contribution of discretionary services spending to overall aggregate card spending growth in the past few months.
While most consumer goods in the U.S. are imported, some are domestically manufactured. Is this the first green shoot in manufacturing?
Empire State Manufacturing Survey
Manufacturing activity grew substantially in New York State, according to the November survey. The general business conditions index climbed forty-three points to 31.2, its highest reading since December 2021.
The new orders index climbed thirty-eight points to 28.0, and the shipments index rose thirty-five points to 32.5, pointing to sharp increases in both orders and shipments. (…)
Labor market conditions were stable. The index for number of employees edged down to 0.9, indicating that employment levels were little changed, and the average workweek index edged up to 6.1, pointing to a modest increase in hours worked.
Price increases remained steady and modest: the prices paid index came in at 27.8, and the prices received index was 12.4.
We sure need to see green shoots. Friday also saw Industrial Production data for October:
The strike at Boeing and hurricanes that disrupted activity, but the fact of the matter is the slump in industrial production is bigger than these one-off factors and output is not yet seeing relief from lower interest rates. In fact, a supplemental note in today’s release clocked the drag from hurricanes as a drag of just 0.1 percent. (…)
The Federal Reserve’s base year for industrial production is 2017 and output set such that 2017=100 for the index. The October reading is 102.3. In the years since 2017, total industrial production has grown less than 3%.
For manufacturing production, the backdrop is worse. The October reading there is 98.5, meaning output is actually down since 2017. The weakness here transcends politics; at its zenith during the past 15 years, manufacturing output never exceeded a reading of 102. Manufacturing production fell again in October just as it has in three out of the past four months. (…)
Source: Federal Reserve Board, Institute for Supply Management and Wells Fargo Economics
Production at factories making consumer goods was little changed. Among consumer goods, the production of durables decreased 1.4 percent, while the index for non-durables increased 0.4 percent. (…)
The massive spend that has already occurred in the building of factories which produce computer and electronics products (particularly semi-conductors and microchips) means plenty of fresh capacity will be coming on-line in the near future. (Wells Fargo)
WHAT IF?
What if this buoyant consumer, nearly 70% of GDP, coupled with recent and coming policies, triggers a U.S. manufacturing revival boosting its contribution above its current 10-11% of GDP?
Manufacturing employment is down 0.5% since the end of 2022 while total employment is up 3.2%. Had manufacturing employment kept pace, the U.S. would have more than 450k additional workers earning good salaries.
According to the Alliance for Automotive Innovation, the automotive ecosystem drives $1 trillion into the U.S. economy each year, about 3.7% of GDP. “Every direct job in vehicle manufacturing supports 10.5 additional American jobs and every $1 spent in vehicle manufacturing creates additional $3.45 in economic value.”
Manufacturing production (black) has been flat since 2012 and is 7.5% lower than in 2007. That’s almost than 2 lost decades.
What if vehicle demand and production start to contribute to growth?
- The average age of light weight vehicles in the U.S. is now 12.6 years. It accelerated sharply during the pandemic as availability declined and prices skyrocketed.
- New vehicle affordability is improving. U.S. households needed 37.4 weeks of income to purchase the average new car in June. Still, vehicle affordability remains markedly down compared to 2019, with prices and interest rates much higher than they were before the pandemic. The typical monthly payment is peaking at $743.
COX AUTOMOTIVE/MOODY’S ANALYTICS VEHICLE AFFORDABILITY INDEX
JUNE 2024
Weeks of Income Needed to Purchase a New Light Vehicle
- Car prices have stalled while labor income keeps rising thanks to steady employment and solid real wage gains. Interest rates are also declining. Affordability could improve meaningfully in 2025.
- Since the pandemic, manufacturers managed their margins installing scarce parts on the more profitable SUVs and light trucks. Sales of less expensive sedans declined to the point where the average age of regular cars shot up to 14 years.
- According to Hedges & Company, about 23% of all light vehicles on the road today are 20 years old or older. That’s 66M vehicles! Another 57M are 15-19 years old. Total: 123M cars are more than 15 years old. Hedges and Co. informs us that “the nation with the oldest average age of vehicles in the world is Bolivia, where vehicles are an average of 18.8 years old. The nation in the European Union with the oldest passenger cars is Greece, at 17.3 years.”
- Production seems to be accelerating as supply issues are now largely behind us. Wards Intelligence: “In a reversal of recent trends there was an increase in North America production to the current-quarter outlook in the Wards Intelligence North America Production Tracker, and output in the most recent month [September] finished above expectations.”
- Sales have not increased much yet but rising available inventories will draw more buyers off the sidelines.
- Actually, retail sales of motor vehicle and parts dealers jumped 1.6% MoM in October while prices declined 0.2%. Wards says that “Demand in the retail sector accelerated more than expected at the end of the month, putting October’s final raw volume roughly 15,000 units above the forecast.”
The stage seems set for stronger light vehicle sales and production in 2025, fueling the one third of the U.S. manufacturing industry that’s been essentially idle since 2019.
U.S. based manufacturers sure needs it:
Not that this is a reason to invest in U.S. based manufacturers. Bloomberg’s David Flickling understands what’s going on:
- America Got the World Driving. Now It’s Going Home Detroit’s car industry is turning inward and China will inherit the Earth.
Germany’s Carl Benz might have invented the automobile, but it’s the United States that got us to drive them.
The relentless export of American cars and car culture put the world on the road in the 20th century. By the 1960s, Ford Motor Co. had plants in almost every major European country, as well as Argentina, Brazil, Egypt, India, Israel, Peru, Pakistan, South Africa, Turkey, and Zimbabwe.
Right now, it’s passing that baton to China with barely a fight. The US car industry that emerges will be smaller, less influential — and, eventually, less profitable and financially sustainable. (…)
Prospects of synergies and cooperation on innovation between the China and US businesses have also never been worse. Chinese-made cars or components that transmit data have been banned from the US market under rules introduced by President Joe Biden in September.
His successor Donald Trump has mooted 60% tariffs on Chinese imports, and retaliation from Beijing is likely to focus on US-made cars, still one of the biggest trade flows in the opposite direction. Even as it electrifies, GM’s core North American business of hulking SUVs and pickups is also just very different from Wuling’s locally successful range of microcars, minivans and small delivery trucks. (…)
When Detroit had its last brush with death in 2009, about two-thirds of GM and Ford’s combined sales were outside the US. With China sales dwindling, we’re approaching the point where two-thirds will be in the US, instead. The American car industry is turning inward again for the first time in a century. Detroit got the world on the road. BYD will inherit the earth.
And Americans, draped in tariffs, will pay a premium for their transport needs.
Xi Seizes Role as Global Defender of Free Trade Against Trump Warns against ‘going back in history’ with new trade barriers
China’s leader warned on Friday that the global economy was fracturing as protectionism spreads, leading to “severe challenges.” The world, he declared, had “entered a new period of turbulence and change.”
“Dividing an interdependent world is going back in history,” Xi said in a speech at the APEC CEO Summit in Peru read on stage by one of his ministers. (…)
As he prepares to take office again in January, Trump is now threatening to impose 60% tariffs on China — and, just as crucially, 10% to 20% on the rest of the world.
That universal tariff threat is giving Xi a fresh opening to improve ties with a range of governments bracing for tough negotiations with Trump. On Friday, Xi met one-on-one with the leaders of Thailand, Singapore, Chile, South Korea, Japan and New Zealand — all important US allies and security partners in the Asia-Pacific.
“We’re very invested in making sure we have a rules-based system, not a power-based system,” New Zealand Prime Minister Christopher Luxon said at the APEC CEO Summit. “There has been a shift from rules to power, and that’s something we advocate very strongly for: That irrespective of your size, we want countries to be able to navigate their way in the world through the international rules-based order.”
The fact that it’s unclear whether he’s referring to China or the US, long known as the leader of the free world and champion of globalization, shows just how much global geopolitics has shifted in the past two weeks. The Biden administration has frequently blasted China for failing to follow a rules-based order, with Secretary of State Antony Blinken often leading the charge.
In a speech wrapping up the APEC CEO Summit on Friday, however, Blinken didn’t talk about the rules-based order at all in reeling off a range of accomplishments over the past four years — emblematic of an administration with one foot out the door. (…)
EARNINGS WATCH
From Refinitiv IBES:
460 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 76.3% reported earnings above analyst expectations and 19.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 7.7% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.
Of these companies, 60.6% reported revenue above analyst expectations and 39.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.
In aggregate, companies are reporting revenues that are 1.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%.
The estimated earnings growth rate for the S&P 500 for 24Q3 is 8.8%. If the energy sector is excluded, the growth rate improves to 11.4%.
The estimated revenue growth rate for the S&P 500 for 24Q3 is 5.3%. If the energy sector is excluded, the growth rate improves to 6.3%.
The estimated earnings growth rate for the S&P 500 for 24Q4 is 9.8%. If the energy sector is excluded, the growth rate improves to 12.5%.
Trailing EPS are now $237.12. Full year 2024: $243.49e. Forward EPS: $263.01e. 2025: $274.23.
Guidance has become more cautious:
Analysts not:
This has been a remarkable rise:
SENTIMENT WATCH
Animal spirits! (via Callum Thomas)
- Sentix Survey: The pullback likely also involves an element of digestion or correction of excess bullishness, for example the Sentix survey (8-9 Nov data) on US equities reached an all-time high last week (data goes back to 2001).
Source: @sentixsurvey
- Investment Manager Index: Similarly, the IMI survey (5-7 Nov data) surged to one of its highest readings ever; and strongest since the booming 2021 stimulus frenzy.
Source: Investment Manager Index
- Fund Manager Survey: Likewise, the BofA fund manager survey (1-7 Nov), also saw a surge; not quite to all time highs on this one, but a clear bullish shift among these larger real money investors.
Source: @Callum_Thomas
- Consumer Confidence in the Stockmarket: It also echoes the October reading of the Conference Board survey of consumers (23 Oct cut-off), which reported a record high percentage of respondents expecting higher stock prices in 12-months’ time (n.b. the breakdown was: 51.4% saying higher, 25% same, 23.6% lower). As previously noted on this series, it doesn’t have great predictive value, but does provide a read on the overall mood.
Source: Topdown Charts
- Market Sentiment — Risk Pricing: As another alternative measure of sentiment, the VIX has calmed back toward the low end of the range, while high yield (junk bond) credit spreads have dropped to 17-year lows (high confidence/complacency, very little credit risk premium priced-in here).
Source: Topdown Charts Professional see also: Chart of the Week – Credit Spreads
Ed Yardeni feeds the animal spirits with economic proteins:
(…) we believe that Trump 2.0 represents a major regime change from Biden 1.0 (or was that Obama 3.0?). The corporate tax rate will be lowered from 21% to 15%. Personal income from tips, overtime, and Social Security might not be taxed. Many onerous regulations on business will be eliminated. This was already set to happen when the Supreme Court ruled earlier this year that businesses could challenge regulatory overreach in court. (…)
We expect that better economic growth will boost federal government revenues and that Elon Musk will succeed in slowing the growth in federal government spending. GDP growth might actually keep pace with mounting government debt. (…)
We’ve updated our YRI Earnings Outlook, which is posted on our website, to reflect our increasing confidence that our Roaring 2020s scenario remains on track and might be on a faster track:
Revenues per share for the S&P 500 companies in aggregate should total $1,950 this year, we estimate, up 4.2% from last year’s level. We are expecting increases of 5.1% next year and 4.9% in 2026. That’s a fairly conventional outlook as long as the global economy continues to grow, with strength in the US offsetting weakness elsewhere in the world, especially China and Europe.
(…) we expect that Trump 2.0 will boost earnings over the next two years. So we are raising our 2025 EPS projection from $275 to $285 (up 18.8%) and our 2026 EPS estimate from $300 to $320 (up 12.3%).
(…) we are now more confident that the profit margin will rise to new record highs of 13.9% in 2025 and 14.9% in 2026. Tax cuts, deregulation, and faster productivity growth should make that happen.
We expect that the percent of S&P 500 companies with positive 12-month percent changes in forward earnings will increase sharply from the current 77.1% reading as analysts adjust their spreadsheets for Trump 2.0’s corporate tax cut.
Since the start of 2023, almost all of the increase in S&P 500 aggregate forward earnings has been attributable to rising estimates for the Magnificent-7’s earnings.
We expect to see a broadening of the companies and industries for which analysts raise their sights in 2025.
We are raising our projected S&P 500 forward P/E range through the end of 2026 to 18-22 from 16-21. The October 28 Morning Briefing was titled “Valuation In A Resilient Economy.” We argued that stock valuation multiples are driven by investors’ expectations for the longevity of economic expansions.
As they became less fearful of a Fed-led recession during the past three years, multiples rose. Multiples may stay elevated if investors conclude that a recession is less likely over the rest of the decade now that monetary policy is easing while fiscal policy remains stimulative.
Multiplying our forward EPS estimates by our projected forward P/E ratios yields the following bullish year-end projections for the S&P 500 stock price index: 6100 in 2024, 7000 in 2025, and 8000 in 2026.
The Rule of 20 P/E is 28.1. Yardeni’s P/E range of 18-22 is 21-23 on the R20 scale assuming inflation of 3.0%. The lowest it has been since the pandemic is 22.5 in September 2022 when the conventional P/E was 16.2 and inflation 6.3%.
Note how extreme equity valuations started to correct in December 2000 right when the Rule of 20 Fair Value Index (yellow line) turned down. Inflation was stable around 2.5% then but earnings peaked right at that time.
Biden’s big shift on Ukraine
US President Joe Biden has authorised Ukraine to launch limited strikes into Russia using US-made long-range missiles
Biden is shifting his stance in response to the deployment of thousands of North Korean troops to support Moscow’s war effort and after a barrage of Russian strikes on Ukrainian cities at the weekend. (…)
“Even if limited to the Kursk region, ATACMS [Army Tactical Missile System] missiles put at risk high value Russian systems, assembly areas, logistics, command and control,” said Michael Kofman, senior fellow at the Carnegie Endowment for International Peace think-tank. “They may enable Ukraine to hold on to Kursk for longer and raise the costs to North Korea for its involvement in the war.”
Bill Taylor, former US ambassador to Ukraine, said Biden’s decision made “Ukraine stronger and increases the odds of a just end to the war” and “may also unlock British and French missiles. Possibly even German”. (FT)