Markets on Sale

Black Friday, the day after Thanksgiving, has traditionally signalled the start of the American Christmas shopping season. Retailers would offer massive discounts to lure customers, but the size of turnover would be enough to put them in the black financially for the year, hence the name (or at least that’s one version of its origin).

In recent years Black Friday has spread out across multiple days including online sales (such as Cyber Monday) and to other countries such as South Africa.

Global markets have been on sale for most of the year as bonds and equity prices tumbled. The past few weeks have seen a bit of a reprieve. In honour of Black Friday and Cyber Monday, we ask whether markets still offer investors attractive discounts. Ironically, of course, when there is a sale at the shops, people are often in to buy, sometimes purchasing items they didn’t really need or want. When markets go on sale, people often run away, selling in fear instead of looking for bargains.

While there is no doubt that markets are cheaper across a broad front compared to the start of the year, whether current valuations are exciting or not depends largely on one variable: inflation.

Inflation questions
If inflation, particularly US inflation, recedes quietly in 2023, all’s probably well. If not, we’re in for a scenario where interest rates will have to be higher for longer. This not only risks tipping economies into recession – always bad news for equities – but higher cash yields also create competition for equities.

On the inflation front, there is good news and bad news. The good news is that commodity prices have eased, and that supply chains are gradually becoming unclogged. What this means generally speaking is that goods inflation has peaked and is declining. In some instances, we might even see goods prices decline.

For instance, many retailers stocked up on goods over the past year, worried about a repeat of the shortages experienced in 2020 and early 2021. However, in many instances they’ve gone too far. Therefore, some big Black Friday discounts this year are not just about luring shoppers, but also getting rid of unwanted inventory. The chart below shows how US retail sales progressed relative to inventories. When the lockdowns hit, sales collapsed, but soon outpaced stock levels as demand for goods surged. The ratio declined and prices shot up. Now inventories are rising much faster than sales, so supply is outstripping demand, leading to downward pressure on prices.

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