Goldman Sachs: As long as consumers keep shopping, there’s hope for the economy

Shoppers carrying bags walk up Fifth Avenue in New York City. 

David Goldman | Getty Images
Shoppers carrying bags walk up Fifth Avenue in New York City.

For a market that’s become increasingly jittery over the U.S. economy, Goldman Sachs has a message: All is not lost.

Wall Street’s head-spinning volatility, which last week shaved more than 1,000 points off the Dow Jones Industrial Average, has pushed stocks into correction territory and raised fears for 2019. Although falling stocks and rising interest rates will continue to weigh on sentiment, those negatives are likely to be offset by higher wages and oil prices in retreat, Goldman said in a research note to clients Saturday.

“Three of the key drivers of consumer spending send a positive message for the near-term outlook,” the bank’s analysts wrote.

“First, real disposable income is likely to continue its strong growth due to accelerating wage growth, and recent declines in the oil price are likely to be a significant tailwind to spending in 2019,” Goldman said. November’s jobs data released on Friday showed lower-than-expected payrolls growth but wages growing at the fastest rate in nearly a decade.

“Second, the saving rate looks elevated relative to the high level of household wealth, even after the recent sell-off,” the analysts wrote. And with consumer spending — which comprises 2/3rd of the vast U.S. economy — still strong, “consumer sentiment is likely to stay elevated, reflecting strong underlying economic fundamentals as well as optimism about the labor market and income growth,” the firm said.

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Goldman’s relatively upbeat assessment came against a backdrop of a market buffeted by internal and external risks — most notably the U.S.’ ongoing trade war with China. The Dow has erased its gains for the year, while the S&P 500 pulled back 2.3 percent to 2,633.08 and turned negative for the year.

The bank acknowledged that those sharp losses will translate into “some near-term restraint on spending,” as well as consumer lending. Rising interest rates will also dampen the outlook, the bank said, adding that growth will gradually decelerate from 2.8 percent in the first quarter to an average of 2.4-to 2.5 percent over 2019.

In a somber assessment of its own on Friday, Morgan Stanley forecast the market would remain “range bound” in 2019, citing “the elevated risk of an earnings recession. We expect topline growth to decelerate (due to decelerating GDP) and margins to come under pressure.”

With the Federal Reserve and the European Central Bank pulling back on loose money policies, “the good news is that tightening may be coming to a pause/end early next year which could bring relief to global asset prices particularly if China growth stabilizes,” Morgan Stanley’s analysts wrote.

Still, economists point to the sharp drop in crude prices, which recently fell below $50 per barrel, as a boost for consumers.

“The recent declines in the oil price, the high savings rate, and strong consumer sentiment, largely offset the drag from recent stock price declines, tightening lending standards, and higher rates,” according to Goldman.

“The bottom line is that even after recent declines in the equity market, we continue to expect strong but decelerating consumption growth over the next few quarters,” the bank said.


Cramer’s lightning round: I’m not a fan of Netflix’s stock as an end-of-year buy

Netflix Inc.: “Candidly, I’m not a fan of Netflix. I’m not a fan of Netflix because I think that a lot of it depends on the content and I just don’t find the content as compelling as it once was. I think it’s a good story, but not a great story, because it’s up so much for the year and that’s been a real big determinant about how stocks are doing right now.”

Cytokinetics Inc.: “Very speculative, but I’ll endorse it as long as you understand that that thing is literally one of the most speculative stocks out there.”

Yeti Holdings Inc.: “Yeah, I think [its post-earnings dip is a buying opportunity]. I actually liked the quarter. I mean, far be it from me to disagree with the market’s view, but I liked the quarter. I think it’s OK. The market liked the PepsiCos and the Gileads this week, and the Celgenes.”

The Kraft Heinz Co.: “[What’s not to love?] Well, the fact that it has no growth whatsoever. But I’ll do this for you: I’ll say that if you want to hope that they somehow manage to get some growth, then you can buy it. But if I want no growth, I want safety and I want a bond.”

Chico’s FAS Inc.: “No. Don’t ask me about Chico’s. That was a horrible quarter, frankly. I mean, that may have been the worst of the mall-based stores. No, well, obviously there’s Sears and J.C. Penney, but it was a bad call. I don’t want you in that, OK?”

LyondellBasell Industries NV: “People feel that we’re going into a big slowdown and you don’t want to own a chemical company into a slowdown, but I agree with you. I think it represents good value with a 4 percent yield, but I do prefer DowDuPont.”


Dollar rallies as oil-linked currencies skid amid crude’s price drop

The U.S. dollar inched higher versus its main rivals on Friday, as U.S. traders returned from the Thanksgiving holiday, and investors closely tracked an intensifying decline in crude oil.

The global oil benchmark, Brent for January delivery LCOF9, +1.97%  was down nearly 5%. Growing output continues to weigh on the oil price, despite a recent cold snap. The price drop hurt financial assets across the board, including stocks and commodity-linked currencies.

Don’t miss: 6 key reasons the ‘bottom is falling out’ of oil prices on Black Friday

The Norwegian krone USDNOK, -0.4397%  led developed market losers, trading near its lowest level since May 2017, with one dollar fetching 8.5915 krone, up from 8.5349 late Thursday in New York. Canada’s dollar USDCAD, -0.2947%  also weakened versus its U.S. rival, leaving the greenback to rise to C$1.3208, from C$1.3190.

In emerging markets, oil-linked currencies, the Russian ruble USDRUB, +0.4221%  drifted sharply down, recently at 66.224 ruble per one dollar, compared with 65.603 ruble late Thursday.

As for the greenback’s trade against major rivals, the ICE U.S. Dollar Index DXY, -0.12%  was up 0.1% at 96.830, headed for a 0.4% gain this week.

Elsewhere, European markets continued worrying about Brexit developments ahead of a key summit this weekend.

The future for Gibraltar — a British-held peninsula in the south of Spain — following Brexit is the latest hurdle to emerge during the U.K.’s divorce from Brussels, with Spain demanding to get more of a say in the future of the key transport hub.

Meanwhile, embattled U.K. Prime Minister Theresa May has been trying to appeal to the British public to support the deal she agreed to with the EU on Thursday. The deal had led the pound to climb higher.

On the data front, November PMIs for the eurozone underperformed consensus estimates, with the composite index coming in at 52.4, versus 53 expected, which also weighed on the euro. A reading of at least 50 indicates improving conditions.

The weaker-than-expected data dealt a blow to any investors looking for a eurozone rebound in the fourth quarter, market participants said.

“Continued weakness will have many beginning to doubt the ECB’s ability to hike rates next year,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “Quantitative easing will undoubtedly end in December but talk of another TLTRO [targeted longer-term refinancing options] is feeding into a more dovish take on the ECB.”


As crude cools, impact stocks see surge in traders’ interest

fall in oil prices has reduced fear that oil marketing companies may be asked to share fuel subsidy burden. In October, the government had cut excise duty on petrol and diesel by Rs 1.5 per litre and asked OMCs to subsidise the two fuels by Rs 1 per litre. Analysts see more upside in BPCLNSE 4.10 %. “BPCL may see some more up-move. It has support near Rs 282 and upside till Rs 309. If it goes above Rs 309, it can go up to Rs 330,” said Chandan Taparia, derivative analyst, Motilal Oswal.

The near-term prospects for the companies which have their fortunes tied to crude oil prices look bright.
Oil marketing, paint, and aviation sector companies are slowly seeing the tide turning in their favour as crude oil prices — a key factor for their businesses — have fallen 20 per cent from their recent highs. Derivatives data show traders are covering short positions and adding bullish bets in these stocks, while in the cash market these stocks have surged as much as 13 per cent so far in the November derivatives series. The near-term prospects for the companies which have their fortunes tied to crude oil prices look bright as many of them had fallen sharply in the recent market correction, analysts said. ET takes a look at five such oil price movement-linked stocks which derivative analysts are bullish on and details their outlook in the near term: