Displaying items by tag: consumer spending
The market seems to be in a tussle with itself. On the one hand, some investors are feeling bullish on the economic outlook, while many others feel the recovery is losing momentum. The data isn’t helping because it seems to validate both sides. For instance, jobs recovery numbers have been strong (disappointing somewhat today though) and the overall dip in output is not as bad as many expected. Metals prices, like silver and copper, have been rising, a leading indicator of growing economic activity. However, consumers seem to be hurting with real income dropping tangibly because of the end of government stimulus checks.
FINSUM: It increasingly seems like a k-shaped recovery is taking hold on the sector level. Certain areas of business are doing very well, while others like airlines, retail and more are doing poorly. This appears to mirror what is happening in consumer spending, where the upper middle and wealthy are surviving fine, but the middle and lower classes are getting hurt badly.
Now that many signs are pointing to an improving US economy, some investors think it is time to shift out of growth stocks and into more cyclical sectors. That said, cyclicals—which rely on consumer spending improvements—are going to be a hard place to invest because of the highly variable recovery path for different sectors created by COVID. With that in mind here are a few places to look: transportation (excluding airlines), such as the iShares Transportation ETF (IYT); or infrastructure, like the Global X Infrastructure Development ETF (PAVE); ecommerce and home entertainment, such as the Amplify Online Retail ETF (IBUY); or housing, either through single names like Home Depot and Lowe’s, or a broader homebuilders ETF like the SPDR S&P Homebuilders ETF (XHB).
FINSUM: We find homebuilding to be a very interesting opportunity. One of the reasons that the real estate market has held up is that homebuyers are typically those higher on the socio-economic ladder, whose incomes are much less likely to have taken a hit from the pandemic. Therefore, the growth trajectory for that whole sector looks strong.
The New York Times has published an interesting piece this week which argues that markets and investors are ignoring an ugly and disastrous reality: that the economy is suffering a huge and largely unprecedented collapse in demand. New data out of Europe and Japan, as well as US manufacturing demand, this week showed that demand fell sharply in May, a sharp contrast to the employment jump. The NYT argues that this systemic fall in demand will take time to play out, but that the huge decline in employment and change in behaviors will cause a rupture in demand that will play out over years.
FINSUM: The NYT piece is very bearish. We held off on covering it until new data was released overnight showing a big fall in demand.
The markets are not reflecting it, but sometimes it feels as though the writing is on the wall. The economy is bound to get worse before it gets better. We have been locked down long enough now that consumer habits are shifting and the spending patterns that prolong recessions are taking hold. Total US credit card debt has fallen 5% in five weeks—the fastest fall since the Great Recession. Auto loans are the same. On the whole, the more data comes out, the worse the picture gets.
FINSUM: Job losses have not yet peaked, so we are not even close to being on the road to recovery. We suspect it is going to take a long time to get back to where we were in February. We expect this will be a very wide U-shaped recovery.
Quick quiz: what is the pillar of this bull market? Unless you answered “the US consumer”, you probably are not getting a passing grade. Therefore, any dents to the teflon-coated US consumer are very worrying, and that looks like the road we are headed down. New consumer spending data is in and it is poor. Spending at gas stations, on cars, and on home materials was considerably weaker. The overall boom in spending now appears to be over as we head into the winter, which could prove to be more than just meteorological.
FINSUM: There is good news and bad news. On the downside, this means that consumers may no longer be able to shoulder the load of carrying the economy. On the positive side, this could lead to rate cuts by the Fed, which the market would love, at least in the short-term.