November 27, 2017

There should be a relatively quiet few days in front of us, but December will see a lot of activity.

One focus will be on retail sales. Stores were filled once again on Black Friday, but it appears that store traffic this past weekend was a bit lighter than in the past, while online sales grew at a double digit pace. Today is labeled Cyber Monday, and for sure, there will be an upward blip this morning. But all retailers have gotten into the habit of being promotional both sooner and more often, so whatever data comes out relative to today will be somewhat distorted. On balance, however, it would appear that recent trends are continuing with sales increasingly moving online and away from stores. Traditional retailers have responded by closing more and more locations, both out of choice or via bankruptcy. We may only be in the early innings of that trend. Over time, the retail experience itself has been changing. Malls have become entertainment meccas in order to drive traffic. Online retailers have begun to open physical locations but often with a twist. Physical locations are meant more as outlets to examine and experiment rather than to buy and take home. As a result, while orders can be placed in the stores, merchandise is sent rather than carried away. This allows merchants to reach customers directly without having to bear the costs of carrying large amounts of inventory.

Christmas is all about what’s hot and what’s not. Once again electronics dominate. The new Apple phones, watches, and earphones are all hot. So are new video games and consoles. Apparel remains trendy as hot items fly off the shelves early, and basics need heavy promotion to move inventory. More traditional items, like toys and housewares, are generally soft with a few notable exceptions.

With this all said, we won’t have a real fix on Christmas sales results until much closer to the date. Recent strong economic data and a shot of cold air across much of the nation should be positives, but nothing is ever certain. Traditionally, there is a lull after the Thanksgiving weekend.

But while Christmas is important, it isn’t all that is happening. Friday is the first day of December, and we will get a lot of data related to the economic pace of November. One number we won’t see this Friday is the monthly employment report. Due to calendar quirks, that number won’t be released until next Friday. On balance, expect generally strong data with the notable exception of auto sales.

In Washington, it is getting down to crunch time. There is a deadline of December 8 for Congress to pass spending bills necessary to keep the government running. Republicans would like, once again, to pass a continuing resolution putting off the day of reckoning until after the first of the year. The same is true for the debt ceiling. Both pieces of legislation require 60 votes in the Senate for approval. That means Republicans can’t get this done alone on a purely partisan basis. Thus, it’s an opportunity for Democrats to push back a bit and have some say. There is a squabble this week over who will lead, at least on a temporary basis, the Consumer Financial Protection Bureau. Trump would like it to be Budget Director Mick Mulvaney who would love to dismantle as much of the Bureau as he can. The Democrats want it to be Leandra English who would most likely follow the lead of retiring head Richard Cordray. The law that created the Bureau states that a retiring head can name his successor, but in the long run, the President will get to select the next substantive (as opposed to interim) head, so the squabble is all a bunch of partisan fussing. Nonetheless, it is another irritant to the Democrats, and it could make them a bit more ornery when it comes to passing a spending continuing authorization. Two weeks from tomorrow, voters in Alabama will elect a Senator to fill the seat left open when Jeff Sessions resigned to become Attorney General. Roy Moore today is a slight favorite to win. President Trump has been encouraging his election without providing explicit support given the sexual abuse accusations leveled against Moore. For Republicans, this is a lose-lose event. While they don’t want to see their slim 2-vote majority cut in half, they also don’t want to be seen as supportive of a man who many believe doesn’t deserve to be seated as a Senator. The Senate has the power to refuse to seat someone it deems unqualified. Thus, if Mr. Moore wins, the Republicans have the option of seating him as the properly elected Senator from Alabama. But if they do, you can be sure that anyone running against a Republican in 2018 is going to try to use Moore’s character against their opponent. Should Republicans bind together and elect not to seat Mr. Moore, the act of naming his replacement will fall upon the current Republican governor of Alabama. It all promises to be grand theatre and highly distracting to a very crowded agenda.

What might end up getting shoved aside is tax reform. Republican leadership wants to get a vote in the Senate done this week, but there are still a healthy number of swing votes that haven’t stated which way they are leaning. Public opinion polls, for what they are worth, are negative on the Senate bill. But frankly, I don’t think the public knows enough of the details yet to make an informed decision. It is also quite likely that the bill will change between now and the time of any vote. There are a few Republicans who are not comfortable with removing the individual mandate contained in the Obamacare law requiring everyone to purchase insurance or suffer a financial penalty. There are some who don’t want to see a tax reform bill passed that increases the deficit over the next 10 years. There are some who object to the elimination of certain deductions. In the House, the focus was on the elimination of the ability to deduct state and local taxes but there are few Republican Senators from high tax states. Except for Senator Ron Johnson, none have yet declared themselves explicitly against the current bill as it now stands, but there are a lot who remain uncommitted. Leader Mitch McConnell doesn’t want to hold a vote he can’t win, so there will be a lot of politicking done this week. If Republicans can’t get a vote done this week, it is problematic whether they can get it done at all in December.

As for the markets, there was no news of consequence over the Thanksgiving weekend and that should be reflected in a slow start this morning.

Today, Bill Nye (the Science Guy) is 62. Caroline Kennedy turns 60. Robin Givens is 53. Jaleel White is 41.

James M. Meyer, CFA 610-260-2220

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