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Eric Wallerstein: Hello, I’m Eric Wallerstein for The Wall Street Journal filling in for Dion Rabouin, and this is WSJ’s Take On the Week, the show where we break down the most important things to watch in business and financial news. We cut through the noise to get you ready for what matters. Markets are off to the races this month, stocks and bonds are surging, and investors have the economy to thank. Inflation for consumers didn’t rise in October, a sign that the Federal Reserve may be successfully taming that inflation that soared over the past couple years. The next big test for Wall Street, holiday shopping. A number of retailers are set to report how they did this summer and offer some insight into what they expect in the coming months. But some forecasts are fairly gloomy, the National Retail Federation expects sales this holiday season to rise at roughly pre-pandemic levels, between three and 4%, that’s down from nearly 13% in 2021 when cooped up consumers were online shopping in bulk.
Consulting firm, Bain expects Retail sales to grow just 1% in November and December when accounting for inflation. That’d be the weakest growth since the wake of the 2008 financial crisis. This round of shopping and travel could be the last lap in what’s been a record run for the American consumer, whose financial strength has been one of the main drivers of both the economy and markets this year. The other workhorse that’s powered markets, the artificial intelligence boom. Nvidia, the $1.2 trillion market cap behemoth that makes the graphic chips underpinning video games and AI models, is set to report earnings this week. The stock has gone gangbusters, up nearly 250% this year, with analysts expecting a mountain of demand for their chips to generate lots of sales for years to come. So, we’ll talk about how this week could extend or break the biggest trends in markets, business, and the economy.
But first, let’s start with the consumer, American’s unrelenting willingness to spend has driven so much of this year’s optimism. Facing higher interest rates for the first time in roughly 15 years, many analysts expected the consumer to pull back from shopping and the stock market, ushering in a recession. That hasn’t been the case. Americans continue to splurge, fueled by one of the hottest job markets in US history and a war chest of savings built from COVID-19 pandemic stimulus. But this holiday season could show that Americans are tapped out, especially after retail sales fell in October for the first time since March. Black Friday is at the end of the week and will be followed by a slew of Cyber Monday deals, many of which have already begun. A recent Gallup survey found that nearly three in 10 shoppers are looking to buy a big ticket item.
There’s also been a switch up in what people want to buy, less stuff like cars, furniture, and clothes, and more services like events, travel, and dining out. For insight into whether consumer’s wallets are starting to thin, we’re watching this week’s expected earnings reports from retailers like Best Buy, Lowe’s, and Dick’s Sporting Goods. We’ll find out about how they did in the third quarter, and more importantly, what they’re forecasting for the holiday season. We’ll also be looking for hints at how executives are managing a potential slowdown in sales amid shifting consumer preferences. To dig into this, I’m joined by Sarah Nassauer, a retail reporter at the Journal. So Sarah, what are retailers expecting for Black, Friday, Cyber Monday, and the rest of the holiday season? Are they worried at all that consumers are spending more on services rather than stuff?
Sarah Nassauer: We’re anticipating a pretty dour holiday season, or at least that it could be. Consumers do tend to prioritize holiday spending, like find a way, but certainly all the predictions in terms of sales are for it to be okay but not gangbusters.
Eric Wallerstein: Do you think any of that impact has been inflation and rising prices finally starting to weigh on the consumer?
Sarah Nassauer: Inflation and rising prices are definitely weighing on the consumer. They have been all year, we’ve seen people just shift how they buy. And you have to remember, it’s also in contrast to early pandemic times, when people were in the exact opposite situation, pretty flush with cash and buying a lot of stuff. So, you see retailers having to contend with that comparison as well.
Eric Wallerstein: So, like you said, and during the pandemic we had a ton of stimulus, you built up this war chest of savings, and it looks like it’s starting to run out, credit card delinquencies, defaults are starting to rise. Are we at any risk of the consumer starting to get tapped out?
Sarah Nassauer: Well, that’s the question, some consumers are definitely tapped out. There’s a big difference between being wealthy and poor right now. Of course, like there always is. So, some consumers are tapped out, others less so. We’re seeing consumers overall still spend, there’s a lot of things that we’re still buying, but when you’re a retailer that relies on certain types of goods, like sporting equipment, like at Dick’s.
Eric Wallerstein: And in terms of goods, I know during the pandemic there was a huge supply chain snafu or snag, whatever you want to call it, there were ships waiting in the LA Port. From what I understand, those things have eased, has that helped the retailers themselves manage their inventories and how they’re getting customers their end products?
Sarah Nassauer: Yeah, all those problems have resolved. In fact, if you’re a shipper now you’re in the opposite situation, where demand is down. We see imports down ahead of the holidays, that’s another sign, that retailers don’t expect sales to be gangbusters because they’re bringing in less stuff. However, their inventories are still a little bit higher, many of them, than they would like them to be. That means they’re going to have to discount to get rid of that stuff, to make room for stuff after the holidays. So, you have a lot of folks saying, from a consumer perspective, that could be great, because you wait around and maybe you get a few more deals.
Eric Wallerstein: So, if we’re expecting slower consumer spending, or maybe there’s just less savings, less to spend, and I’m a retailer, I’m the executive of one of these big companies, do I need to cut costs at some point? How do they manage to protect their margins and keep earning throughout this period?
Sarah Nassauer: Definitely retailers are thinking about cutting costs in different ways. Labor is a huge expense, you see them managing how much they pay their workers, or the hours that they give their workers, and managing that cost. You also see a lot of retailers leaning into automation, which is a longer term thing, right? That’s not necessarily going to help this month, but it’s a longer term acknowledgement that they want to cut some of those labor costs.
Eric Wallerstein: How much of that is AI? What are you hearing, I guess, from companies during their earnings, and how much they’re planning to use automation or maybe improving their factory lines? Just what are you hearing from companies?
Sarah Nassauer: It depends what kind of retailer you are. If you have a lot of money to throw at investment in automation, it costs a lot of money upfront to put in these systems, and the technology, and the software, and hire the people that know how to do these things. So, you see a Walmart, a Home Depot, Amazon, obviously, leaning pretty heavily into this stuff. But they’re all conscious of the fact that it’s coming, and when an Amazon or a Walmart start to invest in those things, if you’re a smaller retailer, you think, hey, we’re going to have to keep this in mind, because this is going to shift the market in terms of how we attract employees, how much investors think it should cost for us to have our labor pool, that kind of thing.
Eric Wallerstein: Black Friday used to be the crazy videos of pandemonium at the mall, disorderly lines, of course, a lot of that’s shifted to e-commerce or Cyber Monday deals starting way in advance of Cyber Monday. What does that mean for retailers and those with brick and mortar stores? Is this transition already underway?
Sarah Nassauer: I think this transition has already happened in lots of… I’ve been in stores on Thanksgiving or Black Friday for, I think this will be my eighth or ninth year, coming up, and I could just anecdotally tell you, it’s gotten a lot more calm. Obviously, COVID was a whole different thing, because people weren’t necessarily that excited about going into stores for a few years there. But the holiday is spread out, it starts earlier, that’s why we see deal messaging so much earlier.
Eric Wallerstein: And any big ticket items on your shopping list that you’ll be going out on Black Friday to get?
Sarah Nassauer: I tend to really try to limit my purchases of big ticket items these days, for the same reasons that we see a lot of consumers doing the same thing. I think all of us are not immune to looking at, huh, I’m spending a lot more on groceries, I’m spending a lot more on X, Y, Z, but I maybe still want to take a vacation. I don’t need the new big thing.
Eric Wallerstein: That was Sarah Nassauer, a Wall Street Journal reporter covering retail. Sarah mentioned how automation is impacting the retail industry, so let’s discuss what exactly is behind all that artificial intelligence chatter. We’re talking Nvidia and AI after the break.
How can a tiny chip help run an artificial intelligence model? Here’s a better question, how can it build a trillion-dollar company? Shares of Nvidia hit a new all-time high this month, up about 250% this year. The semiconductor giant unveiled a new chip to power AI last week, their latest shiny new gadget reeling investors in. But there are still big question marks on the stock. After such a wild rise, how much further can it really go? The U.S. government wants to restrict chip exports to China, can the company produce such extravagant results without unbridled access to one of the world’s biggest markets? AI isn’t just an Nvidia story, it’s a stock market story. The S&P 500 is up double-digit percentage points this year, largely on the back of big tech stocks and AI hopes. Is a stock market with a few stars and lots of losers really one poised to go higher? Or is it risky business to bet on a stock market so concentrated in a few companies, should their gains unravel, they can take the broader market down with them?
To get a clearer picture of what’s behind the Nvidia fervor, what to expect from its earnings report this week, and why every investor should be paying attention, I’m joined by Brenda Vingiello, the chief investment officer of Silicon Valley based wealth management firm, Sand Hill Global Advisors, which owns shares of Nvidia. So Brenda, why is Nvidia so important, and what’s driving the surging interest for their graphics chips?
Brenda Vingiello: We’ve certainly seen that demand for Nvidia’s chips has just surpassed everyone’s wildest expectations so far this year. And that’s really because their very specialized type of chips allow more than one process to be happening at the same time. So, it really speeds up the process that happens in a data center, and that’s a really important element when you have something like artificial intelligence, which is very data intensive. So, these are chips that are absolutely needed by a lot of the large cloud providers, and so we’ve started to see that once implementation started, it’s just really snowballed, because nobody wants to be left behind, and everybody needs to continue to be relevant. And we’ve already heard from many of the cloud providers that they’re working on their own chips, but right here and now, Nvidia is really one of the only providers out there, and their chips are incredibly fast. So, that is driving this really significant increase in demand.
Eric Wallerstein: From what I understand, China is a huge source of demand, obviously, a massive population, lots of innovation going on over there. And then the U.S. government recently placed some restrictions on how much Nvidia can export to China. Now, what does that mean for you as an investor? Is this some sort of existential threat, or is this more of a political hurdle for Nvidia to eventually overcome?
Brenda Vingiello: I think there’s still a question about exactly what this means for Nvidia, and we’ve already had a lot of analysts come out with scenario analysis, showing that it could have a detrimental effect with earnings growth in future periods if the company was completely prohibited from selling chips to China, which has become a very large part of their business. So, there is a question about the ultimate growth of that part of their business, but if we think about the overall growth of Nvidia in general, there is still a ton of growth for the company outside of China, but it’s just a question of, is China going to be 0% of their business, or will it still be a part of it? And nobody really knows the answer at this point, probably not even Nvidia. But I think that as time goes on, that’s one of the biggest questions that investors are really going to be trying to answer.
Eric Wallerstein: Why is Nvidia different?
Brenda Vingiello: When you think about artificial intelligence and who’s going to be able to be profitable in the world of artificial intelligence, Nvidia is a clear early winner. With regard to some of the other companies that are endeavoring to implement artificial intelligence, there’s still a question about how they’re going to monetize that, but when it comes to Nvidia, I think it is very clear that they are a profitable winner at this early stage, with their ability to sell these chips to all the major cloud providers in the world.
Eric Wallerstein: So, what would you say to an investor who is worried that these stocks have had such a huge run-up, I should probably take some of my chips off the table? And looking ahead to this week, the next big test is earnings. We get to see what was the third quarter like, what does management think about the fourth quarter, and next year, and what demand looks like? What would you say to some of those investors, and also, what are you looking for in earnings, and could any of that change your perspective on how you’re thinking about Nvidia right now?
Brenda Vingiello: We are long-term investors, so we are not anticipating anything being reported in this current coming quarter that would change our longer term view. Even though we may find that there is some nuance that Wall Street isn’t particularly happy with in the short term, although I doubt that would happen, but let’s just say it did. Particularly with Chinese buyers or something like that, we find out there was a lot of buying ahead of demand, that could certainly come into play and be a source of disappointment. But in our view, this is a solid long-term story, so we’re not going to let a small bump in the road, in terms of expectations, impact our view of whether or not this is an attractive company to own. As we look forward, I think fundamentals are really going to dictate where the stock goes, and when we look at trajectory of earnings, I think that is really what will ultimately drive the stock going forward.
Eric Wallerstein: That was V from Sand Hill Global Advisors. When we return, we’ll talk about a big elephant still in the room for the holidays, travel. American’s desire to travel has overwhelmed some airlines that are struggling to handle all the demand. We’ll be discussing what air travel looks like in the post-2020 world after the break.
Here’s one more thing that we’re watching this week. Nearly a quarter of U.S. consumers, a record high, are planning to vacation in a foreign country over the next six months, that’s according to The Conference Board. More and more Americans have looked to travel abroad ever since the pandemic slammed the brakes on it. Closer to home, AAA projects 55.4 million Americans will head 50 miles or more from home for Thanksgiving. That’s a 2.3% increase from last year. But how much longer will consumers be traveling this much? We have the Journal’s very own travel reporter, Jacob Passy to give us a lowdown.
Jacob Passy: The travel boom following COVID, at the beginning was obviously reflective of how people had been cooped up for so long and wanted to get out there, but we’re also seeing a generational shift where people are valuing experiences more than possessions and things like that. And so, even though we’re possibly seeing some economic frictions in terms of wage growth and things like that, and people are concerned for their jobs, we’re still seeing this world in which people continue to prioritize travel over other things. And so, while we might not be seeing the surge that we saw over the summer in years to come, and in months to come, demand is still going to be really high, and there isn’t really a clear sign yet that that’s going to stop.
Eric Wallerstein: Airline stocks haven’t exactly taken to the skies this year, higher costs are weighing on their bottom line. The cost of fuel jumped 25% from July to September alone, and wages are also on the up. American Airlines recently handed out a 46% boost to its pilot’s compensation over a four-year contract. Delta is dishing out a 34% pay raise. But American Airline stock is down on the year, and shares of Delta, meanwhile, are trailing the broader market. It’s not all doom and gloom, holiday travel remains all the rage. American Airlines expects its busiest Thanksgiving ever, flying 7.8 million passengers over 13 days. Delta is expecting 6.4 million passengers over a 12-day period, and United is forecasting a record 5.9 million passengers over 11 days. This holiday season, keep an eye out not just for consumer travel, but how Airlines are handling worker shortages, higher wages, and fuel costs.
When it comes to spending, it seems that many Americans are choosing to fly rather than to buy. And that’s everything you need to know to take on the week, for Sunday, November 19th. The show is produced by Jess Jupiter. We had additional help this week from Charlotte Gartenberg. Jonathan Sanders is our booking producer. Michael LaValle and Jessica Fenton are our sound designers. Michael also wrote our theme music. Aisha Al-Muslim is our development producer. Scott Saloway and Chris Zinsli are the deputy editors, and Philana Patterson is the head of news audio for The Wall Street Journal. For even more, head to wsj.com. I’m Eric Wallerstein, thanks for listening.