Two Thanksgivings

Brit Ryle

Posted December 4, 2023

In 1939, America celebrated Thanksgiving twice. 23 states and the District of Columbia had their turkey dinners on Thursday, November 23. 22 states piled their plates a week later, November 30. 

Maybe not surprisingly, the split went right down political party lines. Most of the 23 states that went with November 23 as Turkey Day had Democrat governors. The remaining 22 states that waited a week were Republican. 

Perhaps unsure of their political loyalties, or maybe just big fans of turkey dinners, Colorado, Mississippi and Texas said screw the politics, let’s have two Thanksgivings…

It seems fitting for a country that politicizes everything, but the two Thanksgivings in 1939 wasn’t really about politics. It was about economics. Apparently back in the good ole days, retailers had the good taste to wait until after Thanksgiving to start the Christmas advertising blitz. So instead of appearing crass, they asked Franklin D Roosevelt to move Thanksgiving ahead on the calendar to give US retailers an extra week of sales between Thanksgiving and Christmas.  

One CEO at the time estimated that the extra week of Christmas retail sales might mean a $20 billion boost (in today’s money) to stores. 

It’s funny the kind of pushback that Roosevelt received for giving the economy a little boost. Some people called the new holiday “Franksgiving.” 

His opponent from the 1936 presidential election said that Roosevelt was acting with the “omnipotence of a Hitler.” (I guess hurling invectives like the “H” word at our rivals is a pretty solid American tradition too…)

So, it’s not really clear that moving Thanksgiving actually added to retail sales numbers, or just spread spending out over a longer time frame. But the importance of Black Friday and now Cyber Monday as harbingers of holiday retail sales is pretty much entrenched…

Buy, Buy, Buy

In 1926, Baltimore journalist H.L. Mencken wrote: No one in this world, so far as I know—and I have searched the records for years, and employed agents to help me—has ever lost money by underestimating the intelligence of the great masses of the plain people. 

Though not exactly flattering, variations of this theme have been repeated many times. P.T. Barnum has been quoted as saying nobody ever went broke underestimating the taste of the American public.

Today, you mostly see this sentiment expressed simply “never underestimate the American consumer.” 

Personally, I like this version best, because I don’t see any reason to insult anybody about their spending habits. What’s important is that the U.S. economy is 70% driven by consumer spending, we’re Americans, and we’re gonna perform our patriotic duty, dammit!

But seriously, the power of the U.S. consumer is why recessions are so hard to predict. You have to have two consecutive quarters of negative GDP growth to get a recession. And that means Americans have to actually cut spending on a year over year basis. And when you get right down to it, there’s only one reason any of us cut our spending: unemployment.

This is why all the forecasts for a 2023 recession never materialized. It seemed as though pushing interest rates from essentially zero to over 5% In 16 months would inevitably slow the U.S. economy to the point that unemployment levels would rise. So I guess we should add a warning about underestimating the US economy, because the soft landing that was far-fetched even 6 months ago seems to have been achieved…

Black Friday marked a pretty solid turnaround point this year. Up until November 24, analysts were still cautioning that holiday retail sales might not be so hot. But then Black Friday revenue came in 7.5% better than last year…

Yes, we’d already enjoyed a powerful November rally. But the sentiment that pushed stocks got a critical validation from the start of the holiday sales season. Strategist-types have backed off their calls for recession in early 2024. 

What’s Ahead for 2024

One of the best places to look for signs of economic slowdown is corporate earnings. Right now, earnings for the S&P 500 are expected to finish 2023 at $221 a share. Analysts are estimating 11% earnings growth for 2024 – to $246.30 a share. 

Now, the good people at FacSet research tell us that over the last 25 years, analysts have overestimated earnings estimates for a coming year by 6.9%. Factor that in, and FactSet concludes that perhaps we’d be better off expecting the S&P 500 to earn $229 a share in earnings. 

BUT – FactSet also offers up this little chestnut: 

However, this 6.9% average includes four years in which the difference between the bottom-up EPS estimate at the start of the year and the final EPS number for that same year exceeded 25%: 2001 (+36%), 2008 (+43%), 2009 (+28%), and 2020 (+27%). These large differences can be attributed to events that may have been difficult for analysts to predict at the start of the year. In 2001, the country endured the 9/11 attacks. In 2008 and 2009, the country was in the midst of economic recession. In 2020, economic lockdowns were implemented due to the COVID-19 pandemic. If these four years with unusual circumstances were excluded, the average difference between the bottom-up EPS estimate at the start of the year and the final EPS number for that year would be 2.0%.

First of all, It’s fascinating how well U.S. companies have performed during some really tough times. And we should probably add 2023 to that list. Because once again, the companies of the S&P 500 were far more resilient to inflation and interest rate hikes than analysts thought they would be a year ago. 

And second, current earnings estimates do not take into account the potential for the Fed to cut interest rates in 2024. And I’ve seen plenty of commentary questioning the wisdom of rate cuts in 2024. After all, the logic goes, 5% interest rates aren’t particularly high on an historical basis. Why should they be cut so quickly?

I can think of a couple reasons. There’s the $780 billion the U.S. government is expected to spend paying the interest on its debt over the next year if rates remain at current levels. No real reason to do that if it’s not necessary to fight inflation…

Mortgage rates are another pretty compelling reason to cut rates. While it’s true that homebuilders can offer lower than market rates when you buy a brand new home, existing home sales are at a 20 year low, largely due to high mortgage rates. Fed rate cuts would unlock a lot of economic activity. 

And finally, the Fed could ease some potential liquidity issues for banks (like those that took down Silicon Valley Bank back in March) with some timely interest rate cuts. It could also ease the refinance burden that is affecting commercial real estate with lower rates. 

Right now, the S&P 500 is trading with a forward P/E of 18.5. That’s a little higher than historical averages, but not terribly so. And given how much mega-tech companies dominate total earnings for the stock market, smaller stocks can push much higher in price without making the market look expensive…and my watch list is littered with small companies that have run 30+% over the last month.

That’s it for me today, take care and I’ll talk to you Wednesday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today