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Spending and stocks: How the holidays affect your holdings

A woman carrying shopping bags.

What does one of the richest men in Europe buy his wife for Christmas? Why, Tiffany’s of course. And we’re not talking about just a bracelet in one of those signature blue boxes; he bought the whole company — for about US$16 billion.

In the weeks to come, many others will be looking to put presents under the tree as well, and that has me interested in examining consumer discretionary stocks as a whole this holiday season.

It’s about margins and demand

Louis Vuitton Moët Hennessy (LVMH), the company that bought Tiffany & Co. in late November, is one great example of the stocks we like to own. It’s pretty popular and is owned by several of our portfolio managers. Why would LVMH buy Tiffany’s? As in a lot of luxury goods companies, their margins are really high. This company can take silver at US$16/oz., shape it, put it in a little blue box and sell it for US$500/oz: they’re basically selling luxury in a box. That’s a high-margin business, and it fits in well with the rest of LVMH’s brands. Another attractive aspect of luxury goods is the resilient customers who buy them. The person buying a Louis Vuitton handbag for their partner, for example, is generally “well-heeled” enough that their spending probably won’t be curtailed by a shift of fortunes in the general economy.

For the rest of us, there are other companies to shop at. Their stocks are also doing well and will likely continue to do well this holiday season. Amazon is the big one that comes to mind, followed by Disney (thank you, Disney+) and perennial favourite, Apple. In our portfolios, we also hold brands like Lululemon that tend to do well during the holiday season.

Current conditions support strong consumer spending going forward

Happily for retailers and shareholders, there is a lot of support suggesting that consumer spending will continue to be strong this holiday season. Although consumer sentiment numbers have dipped in Canada, consumer sentiment in the United States remains quite high. Recent income gains were reported by 45% of all households surveyed in the October 2019 Consumer Sentiment Survey conducted by the University of Michigan.1

Unemployment is also exceptionally low in the United States. From the previous month, unemployment came in lower in October in four states, higher in two states, and stable in the remaining 44 states and the District of Columbia. According to the U.S. Bureau of Labor Statistics, eight states had jobless rate decreases compared with a year earlier, three states reported jobless rate increases, and the remaining 39 states reported little or no change. The U.S. national unemployment rate was also little changed month-to-month and year-over-year.2

Want more good news? In North America, inflation is low as are interest rates, making it cheap to borrow money. This benefits the average consumer who will spend their money on discretionary items, and lower interest rates also help to support the stock market and assets like real estate, giving a continued boost to the wealthy (who do their holiday shopping at companies like Louis Vuitton).

In short, most people should be feeling pretty good about things right now. Earnings may be slowing and there is a slowdown occurring in manufacturing, but the economy as a whole is in pretty good shape.

Don’t get December jitters

Given global market performance last December, however, where stocks sold off dramatically, investors are no doubt wondering whether there might be something similar in the works for this December.

The December 2018 drop we saw in stock prices was largely due to the U.S. Federal Reserve’s talk about (and then going forward with) raising interest rates, in an effort to keep the U.S. economy from overheating. Concerns that this would be a crushing blow for economic growth (concerns that did not materialize) led to the market sell-off we saw late last year.

Historically, December returns generally aren’t out of line with the rest of the year the way they were in 2018. The large market drawdown we experienced was a singular event that should not worry investors as we head into this holiday season.

Do consumer discretionary stocks get a lift during the holidays?

So do consumer discretionary stocks trade higher as retailers rack up December sales? As a kid, I certainly thought they might. I clearly remember sitting with my dad, reading the business section of the newspaper (remember when stock information was printed in the back pages of your daily paper?) and thinking that I would very much like to buy and own toy company stocks in the lead-up to Christmas. My belief was that these shares would go up with all of the toy sales.

Intuitively, investors may similarly think to make a play on the consumer discretionary sector, hoping that increased holiday spending will boost returns. A look at the numbers, however, quickly shows that these companies’ stocks are not cheap, suggesting that the holiday spending boost is already priced into their respective stock valuations (as of December 2nd, Amazon is trading at 78 times earnings, LVMH at 30 times and Lululemon at 55 times).

Although consumer discretionary stocks do have an edge in December, their advantage is very slight. Over the past 20 holiday seasons, the consumer discretionary sector outperformed the market 55% of the time, by an average of 2.76%. The sector underperformed 45% of the time, by an average of 1.57%.

For more information about how your portfolio is positioned heading into the holidays, please contact your MD Advisor*.


* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).



About the Author

Craig Maddock, CFP, CFA, CIM, MBA, is Vice President, Senior Portfolio Manager and Head of the Multi-Asset Management Team of 1832 Asset Management L.P. He leads the team of portfolio managers and investment analysts responsible for managing the firm’s mutual funds and investment pools.

Profile Photo of Craig Maddock