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Brace Yourself for a December Hike as Economy Picks Up

Zacks

After the much-talked about Presidential election wherein Donald Trump triumphed over Hillary Clinton, the market has its eyes set on the Federal Reserve that hinted at a rate hike in December at its last meeting. Undoubtedly the economy is picking up steam, with inflation gradually edging toward the desired 2% target and strength in the job market. Together, these have set the stage for a rate hike this December.

Is the Economy on Track for a Rate Hike?

A slew of economic data suggests that the environment is much conducive now and the Fed officials may have little difficulty in arriving at a decision. Post Brexit, the U.S. economy looks much steady. The second estimate for GDP shows that the U.S. economy grew 3.2% in the third quarter, faring better than the first estimate of 2.9% growth and the second-quarter anemic increase of 1.4%.

Another factor that makes the case strong for a rate hike is the rise in consumer confidence. According to the recent Conference Board data, the Consumer Confidence Index rose to 107.1 in November from October’s upward revised reading of 100.8, and is at its highest level in nine years. Definitely, Trump’s future policies will play a crucial role in defining consumer sentiment but for now, all seems well.


Per the Labor Department, the economy added 161,000 jobs in October. Although not spectacular, this points to growth. Given an improving labor market and the gradual rise in wages, we expect consumer spending to improve. Consumer spending increased 2.8% in the third quarter compared with 2.1% anticipated earlier.

The optimism over the health of the economy gets a further boost from the recent U.S. factory activity data. The Institute for Supply Management (ISM) stated that the index of national factory rose to 51.9 in October from 51.5 in September.

What Will the Fed’s Move Be?

Of course, the economy is not in bad shape. The reasons for the liftoff are on the table and Janet Yellen may have no problem imposing it. The widely accepted speculation is that the Federal Reserve may raise its benchmark interest rate in December, after due consideration of the global as well as domestic economic climate.

Last year in December, the Federal Reserve raised interest rates for the first time in almost a decade to a range of 0.25%−0.50%, and currently the market is bracing for at least another quarter-point increase. Industry analysts predict that encouraging economic data might reflect in an interest rate hike – a step toward “normalizing monetary policy”.

The Final Verdict

The economy being back on track definitely bodes well for all, and most importantly for brick & mortar and online retailers as this part of the year marks a make-or-break time for them. Retail stocks get a push during the holiday season. With the ability and willingness among consumers to spend more, retailers could hear their cash registers jingle this season.

Data compiled by the nation's largest retail trade group, National Retail Federation, project a 3.6% rise in November and December sales (excluding autos, gas and restaurant sales) to $655.8 billion, which is far better than the 10-year average sales growth of 2.5%. Non-store sales for the season are expected to increase 7–10% to approximately $117 billion.

Macy’s, Inc. M, Target Corporation TGT, Kohl’s Corporation KSS, Amazon.com, Inc. AMZN, Best Buy Co., Inc. BBY and Wal-Mart Stores, Inc. WMT are all geared up to make the most of the season.

We believe that the retail sector will hog all the attention with the advent of the holiday season. So, how about betting your bucks on lucrative options? Out of the six stocks mentioned above, Best Buy flaunts a Zacks Rank #1 (Strong Buy) and Target holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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