S&P 500 to Gain 11%+ for Nov… as Online Sales Surge

• The “New Normal” for Consumer Shopping
• Black Friday Online Sales up 22% YoY ($9B) as In-store Traffic Craters
• Near-term 3800 Price Target for S&P 500

“Black Friday” is generally regarded as one of the largest U.S. shopping days of the year…

It’s also the start of the Christmas holiday season shopping period. 

This is a closely watched event given ~70% of all US GDP is a function of what consumer’s spend. 

What’s more – it gives us insights into how and where consumers are shopping (e.g., online versus physical; specific categories etc). 

And this year didn’t disappoint… as investors whipped out their trusty “plastic cards”

According to CNBC:  

Spending online on Black Friday this year surged nearly 22% to hit a new record, according to data from Adobe Analytics, as the Covid pandemic pushed more people to shop from the sofa and avoid crowded stores and malls.

Consumers spent $9 billion on the web the day after Thanksgiving, up 21.6% year over year, according to Adobe, which analyzes website transactions from 80 of the top 100 U.S. online retailers.

This makes Black Friday 2020 the second-largest online spending day in history in the United States, behind Cyber Monday last year, Adobe said.

Cyber Monday this year is slated to become the largest digital sales day ever, with spending reaching between $10.8 billion and $12.7 billion, which would represent growth of 15% to 35% from a year earlier.

When I read this – my immediate thought was ‘never underestimate the will of the American consumer to spend’.

It’s insatiable. 

And it doesn’t matter if they don’t necessarily have the money (as most don’t)… as there is always credit (another conversation)

For example, whilst there may be a massive (pandemic) income recession in many corners of the US economy – it doesn’t matter. 

This year, Adobe found consumers spent $6.3 million per minute online, or $27.50 per person, on average.

Interestingly, spending on smartphones surged 25.3% year over year to reach $3.6 billion, representing 40% of total e-commerce spending.

Hot items included Hot Wheels, Chess sets, Lego, Apple AirPods, Apple Watches, Amazon Echo devices and Samsung TVs, according to Adobe data, as consumers scoured the web for things to entertain themselves and their kids.

In-store Sales Crater

Whilst online retailers are capitalizing on the pandemic shift – physical retail continues to decline. 

CNBC reported that traffic at stores fell by 52.1% compared with last year according to preliminary data from Sensormatic Solutions.

This report said many malls looked bleak, and parking lots were more empty than full.

On Thanksgiving Day, when many retailers including Walmart and Target closed their stores this year due to the pandemic, traffic dropped 94.9% year over year, according to the firm. Week-to-date, traffic is down 45.2% across the U.S.

Domestic Travel Slowly Recovering

The other data point worth noting is what we see with domestic U.S. travel. 

Thanksgiving week is also traditionally the busiest week of the year for travel. 

And whilst travel has slowly been picking up – it’s still down a whopping 60% on the same period last year (as this chart from Scott Grannis shows)

Air Travel Change YoY (7-Day Avg) — TSA and Scott Grannis

I think if we believe things are starting to get back to “normal” – then it will most likely show up here first. 

For example, from mine it will be interesting to watch how this chart (potentially) accelerates when vaccines start becoming widely available next year. 

S&P 500 – VIX Declines on Optimism

As I was saying last week – November 2020 looks certain to another record breaking month.

Before I share the weekly chart for the S&P 500 – let’s take a look at the monthly trend to dimension the move:

S&P 500 – Monthly – Nov 28 2020

With one trading day remaining – the S&P 500 is up a staggering 11.3% for the month. 

However, the big difference between this month and say what we saw for April, is this rally is broad-based. 

It hasn’t just been tech stocks surging ahead (which was the case for most of this year) – November has seen massive moves with small caps stocks which look set to benefit most from a broader re-opening over 2021.

For example, below is the performance of the Russell 2000 the past month versus the Dow Jones, S&P 500 and Nasdaq

Russell 2000 Outperforming Other Sectors over Nov 2020

The other data point to note is what we see with the VIX (or the “fear index”)

If we go back to the monthly chart – you can see it’s now trading at its lowest level since January (highlighted with the orange dashed line). 

This is a great indication of how much more comfortable traders are feeling about risk. 

My personal feeling here is investors are now too complacent with some of the risks still ahead.

I might be totally wrong (and not for the first time)… but we will see.

Let’s now look at the weekly chart: 

S&P 500 – Weekly – Nov 28 2020

Using this timeframe – we can see the relative decline in momentum with the MACD (lower window)

And whilst it has ticked up the past couple of weeks – the trend from June is lower. 

However, compare that with the higher price action.  This is what technical analysts call “negative divergence”. 

My best guess here is expect the S&P 500 to challenge a level of 3800 before the end of the year. 

That’s about 4.5% higher than where we closed last week. 

Now as an FYI – if were to challenge 3800 – that’s an approx forward PE of around 23.5x (based on 2021 earnings of $163 per share for the S&P 500)

Source: Earnings Insight – Factset

And whilst a forward 23.5x is high – we are also mindful of a zero rate environment and ample liquidity available.

Now in addition to no other viable alternative (“TINA”) – this is almost forcing investors to stocks for a return. 

What I’m watching here is the increasing divergence we are seeing here between the light-blue line (S&P 500 – left-hand axis) and the dark-blue line (forward earnings estimate) 

Over time – there is generally a reversion to the mean – and this can be quite sharp. 

Putting it All Together

I expect stocks to continue their move higher throughout December on continued optimism. 

However, I see resistance around 3800. 

And at some point in early 2021 – investors will shift their attention to what they see with Congress and the next stimulus deal. 

For example, my feeling is the the market is pricing in something in the realm of $2.0T to $2.5T. 

But will Mitch McConnell agree with the Democrats (and Yellen)?

And further to that, will McConnell still be the Republican majority leader after the two Georgia run-off elections on Jan 5th?

Following news of the stimulus – investors will then start focusing their attention on earnings and justification of the massive multiples they were willing to pay throughout 2020 (i.e., what I call an earnings “hall pass” for the pandemic)

That’s still a long way in front of us… but for now optimism is in the air. 

Regards,
Adrian Tout