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Global Investment Strategy

November 23, 2015 (Weekly Update)

Tracie McMillion, CFA®, Head of Global Asset Allocation Strategy

Market insights from the Global Investment Strategy team

  • Seasonal sales in the U.S. should see a relatively strong 3.7 percent increase this year.
  • Online retailers are continuing to gain ground.

What it may mean for investors

  • We recommend equity investors overweight Consumer Discretionary within a diversified portfolio.

The Changing Consumer

U.S. consumers have been fickle this year. On the surface, they appear more frugal than we’ve observed in recent years. When we remove auto sales from consumers’ expenditures, the remainder of retail sales has been declining on a year-over-year basis for most of 2015. Such a decrease in retail sales hasn’t happened since the great recession.

Chart. 1 Declining Retail Sales Ex-Auto (Percentage Change Year-over-Year)Chart. 1 Declining Retail Sales Ex-Auto (Percentage Change Year-over-Year)

Source: FactSet, November 22, 2015

This is an important trend for retailers and investors to watch. Does this lull in consumer spending mean shoppers will spend less this holiday season? We think that’s unlikely. Over the past 13 years, there has been only one year, 2008, when holiday spending declined from the prior year. Negative year-over-year holiday sales are not likely to be repeated unless another recession were underway, and we do not think that is the case.

Declining retail sales in the current economic environment do, however, present a conundrum for market observers. Conventional thinking is that lower gasoline prices and improving consumer confidence should cause retail sales to increase, not decline. Yet, looking deeper into the retail sales data, we see a more positive trend emerging. Lower gasoline prices, in fact, may be a predominant reason for lower overall retail sales. Removing gasoline purchases from the data reveals a healthy 3.5 percent gain in retail sales from October 2014 to October 2015.1

Additionally, an improving employment outlook for U.S. workers should support retail sales this holiday season. More full-time jobs have been added to the U.S. labor market throughout the year, pushing the unemployment rate down to just 5.0 percent. In fact, this year’s seasonal employment could top 2014 levels. Temporary jobs for this year’s holiday season, including those in retail, transportation and fulfilment, are expected to increase by as many as 750,000. This gain supports our expectation that U.S. consumers will spend more this year than last. Although the year-over-year increase in sales is not expected to be as strong as last year’s, it should still exceed the 10-year average of 2.5 percent. The National Retail Federation (NRF) estimates that sales this November and December will top $630 billion, a 3.7 percent increase over 2014 sales during the same period. The increase, however, is expected to fall below the 4.1 percent increase in 2014 retail sales over 2013 sales.

This weekend we will get an important glimpse into how consumer shopping preferences are shifting. The NRF reported that 87 million people shopped on Black Friday in 2014, that’s about one in every four Americans. Although this is a staggering number, it was eclipsed last year by the 127 million (one in three) Americans who shopped online during Cyber Monday—the Monday following Black Friday. In fact, while brick and mortar sales have barely budged between October 2014 and October 2015, online retail sales have increased more than seven percent during the same period.2

On average, retailers earn 20 percent of their total annual sales in the last two months of the year. So for investors, the U.S. retail sales picture looks supportive of a positive holiday season. An increase of 3.7 percent over last year’s holiday sales could mean that fourth-quarter corporate earnings for the retail sector will be in line with analysts’ expectations. A change to colder temperatures could also spell a change in fortunes for clothing retailers who, so far this season, have been suffering with a surplus of winter clothing inventory. Individual retailer’s success will depend on their ability to meet the shifting preferences of a more frugal consumer. Retailers with an online presence along with those offering low prices and free delivery likely will win the battle for sales volume this season. But their ability to maintain profit margins will determine whether they can retain investor support. We recommend an overweight to consumer discretionary equities within a diversified portfolio that matches your risk tolerance, time horizon, and investment objectives.

All data sourced from the National Retail Federation (NRF), November 2015, unless otherwise noted.

Tracie McMillionAbout Tracie McMillion

Tracie McMillion is the head of global asset allocation strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

In her current role, Ms. McMillion leads the development of global investment strategy. She oversees the creation of asset allocation recommendations and writes economic and market commentary and analysis. Ms. McMillion has been quoted in The Wall Street Journal and Barrons, on CNBC, and in other financial media outlets.

Ms. McMillion has more than 18 years of experience in financial services. Prior to her current role, she served as an asset allocation strategist and a senior investment research analyst for Wells Fargo and predecessor firms. Earlier in her career, she served as lead portfolio manager for Evergreen Private Asset Management where she managed assets for high-net-worth clients and philanthropic organizations.

Tracie earned a Bachelor of Arts in Economics and a Master of Business Administration from the College of William and Mary in Virginia. She is a CFA® charterholder and member of the CFA North Carolina Society. Ms. McMillion is located in Winston-Salem, North Carolina.

1Source: FactSet, 11/23/2015
2Source: U.S. Commerce Department, October 2015

*As of Sept. 30, 2014

Risk Factors

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.

Diversification does not guarantee profit or protect against loss in declining markets.


Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

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