The 12 Days of Christmas Bust the Budget

Every year, PNC Financial Services Group's (NYSE: PNC  ) PNC Wealth Management compiles a clever rundown of how much it could cost to purchase "The Twelve Days of Christmas" gifts for true loves. For most of us, the $27,393 total price tag to buy one of each gift this year sounds outrageous, but the relatively low year-over-year price increase indicates low inflation. But stacked up against recent history and in the view of the real economy, does it really?

Just for starters, we can glean that anemic price increases reflect retailers' weakness this year. It's going to be a tough holiday season by many accounts and many retailers won't be able to coax higher prices for items far less expensive than pipers piping. Oddly enough, though, if we were inclined to indebt ourselves for the song's gift list, we'd pay more for the 12 items now than we would have during the 2007 housing bubble top.

This could make us all wonder about whether to buy into the ongoing bull market. Is the real economy really all that strong after all these years, as the market's levels would indicate?

Investing in our true loves
Let's think about the clever index's data through a different lens. One might think that the prices on the items would have been astronomical in 2007, before the housing bubble burst. Americans in a wide swath of society could afford a lot more stuff when credit flowed freely and consumers used their houses as ATMs.

According to USA TODAY, PNC's managing executive of investments, Jim Dunigan, noted of this year's index, "We were surprised to see such a large increase from a year ago, given the overall benign inflation rate in the U.S." The reported 1.7% increase in the Consumer Price Index does sound minor.

Let's flash back to 2007, though, when the housing bubble and consumer-driven gluttony were still in euphoric swing. Buying just one of each item would have cost $19,507 in 2007, so we would pay 40% more to check off the romantic list today.

Granted, the clever holiday list includes complexities. For example, since 1984, the average prices of the items have increased by 2.9%. While some prices have remained stable, others have leapt.

For example, a $19.95 pear tree in 1984 now sports a $184 price tag. Wait till the post-holiday markdowns. Seven swans for $7K sounds nutty, but American consumers would pay the same price now.

The bubble years were by definition unsustainable and artificial, of course, and the economy did need to correct. However, it's added up to an extremely painful situation for many Americans, and it's not something to gloss over when thinking about one's investments.

Retail's reality check
Retail can be a strong indicator of what's going on with real American consumers.

In November, Wal-Mart (NYSE: WMT  ) warned about its outlook for holiday season sales, lowering its estimates. Maybe reports of Wal-Mart's solid Black Friday and Cyber Monday sales will save the day for that retailer; apparently towels are hotter this year than five golden rings, since some shoppers reportedly fought over them. Of course, that also says something about the types of things Americans want at bargains, and that's a far more basic item to fight over than the traditional hot items that have spurred altercations in the past, like electronics.

Like Wal-Mart, many other retailers have warned about their outlooks, and that tells us a lot about this cutthroat holiday season. In fact, margins are already plummeting as retailers desperately seek to offer rock-bottom deals to holiday shoppers. In some stores, inventories are building because retailers miscalculated the demand for some merchandise.

Deep discounters aren't the only ones offering even deeper discounts to boost holiday sales. Just this week, American Eagle Outfitters (NYSE: AEO  ) cut its profit guidance for the tail end of 2013. The retailer is slashing prices, which will likely turn out to be a strong theme this holiday season. The teen sector is struggling overall, showing weakness in a segment that used to represent a lot of discretionary spending.

The bull market's swan song?
These days, the items in the iconic song aren't in great demand, and that's good, since most of us certainly couldn't afford them for a dozen days of charm. (And of course, these days, most true loves would find most of these gifts downright weird.)

The sad thing is, many Americans can't afford much at all this year, and will be pinching their pennies. Consumer spending makes up the lion's share of our economy and the holiday season is usually the best time to coax spending. We can learn a lot about the consumer by gauging what they're spending.

We've got plenty of signs of overall weakness continuing to drag on Americans. However, those who invest in stocks may not be taking the current reality very seriously. We're in the midst of a bull market with no end in sight, and caution is in short supply.

But investors should proceed with caution right now. Spending $7,000 on the full gift set of swimming swans is likely a poor investment for most of us. Many of the weaker companies whose stocks are trading at high valuations or tanking on fundamental business concerns are poor holiday investments as well.


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