Posts tagged ‘consumer spending’
Investors Scared Silly While Stocks Enjoy Sugar High
China trade war, impeachment hearings, Brexit negotiations, changing Federal Reserve monetary policy, Turkish-Kurd battles in Syria, global slowdown fears, and worries over an inverted yield curve. Do these headlines feel like a conducive environment for stock market values to break out to new all-time, record highs? If you answered “no”, then you are not alone – investors have been scared silly despite stocks experiencing a sugar high.
For the month, the S&P 500 index climbed another +2.0% and set a new monthly-high record. The same can be said for the Dow Jones Industrial Average, which also set a new monthly record at 27,046, up +0.5% from the previous month. For the S&P 500, these monthly gains contributed to what’s become an impressive 2019 total appreciation of +21%. Normally, such heady gains would invoke broad-based optimism, however, the aforementioned spooky headlines have scared investors into a coffin as evidenced by the hundreds of billions of dollars that have poured out of stocks into risk-averse bonds. More specifically, ICI (Investment Company Institute) releases weekly asset flow figures, which show -$215 billion fleeing stock funds in 2018-2019 through the end of October, while over +$452 billion have flocked into the perceived safe haven of bonds. I emphasize the word “perceived” safe haven because many long duration (extended maturity) bonds can be extremely risky, if (when) interest rates rise materially and prices fall significantly.
Besides the data showing investors fleeing stocks and flocking to bonds, we have also witnessed the risk-averse saving behavior of individuals. When uncertainty rose in 2008 during the financial crisis, you can see how savings spiked (see chart below), even as the economy picked up steam. With the recent spate of negative headlines, you can see that savings have once again climbed and reached a record $1.3 trillion! All those consumer savings translate into dry powder spending dollars that can be circulated through the economy to extend the duration of this decade-long financial expansion.
Source: Dr. Ed’s Blog
If you look at the same phenomenon through a slightly different lens, you can see that the net worth of consumer households has increased by 60% to $113 trillion from the 2007 peak of about $70 trillion (see chart below). This net worth explosion compares to only a 10% increase in household debt over the same timeframe. In other words, consumer balance sheets have gotten much stronger, which will likely extend the current expansion or minimize the blow from the next eventual recession.
Source: Calafia Beach Pundit
If hard numbers are not good enough to convince you of investor skepticism, try taking a poll of your friends, family and/or co-workers at the office watercooler, cocktail party, or family gathering. Chances are a majority of the respondents will validate the current actions of investors, which scream nervousness and anxiety.
How does one reconcile the Armageddon headlines and ebullient stock prices? Long-time clients and followers of my blog know I sound like a broken record, but the factors underpinning the decade-long bull market bears repeating. What the stock market ultimately does care about are the level and direction of 1) corporate profits; 2) interest rates; 3) valuations; and 4) investor sentiment (see the Fool-Stool article). Sure, on any one day, stock prices may move up or down on any one prominent headline, but over the long run, the market cares very little about headlines. Our country and financial markets have survived handsomely through wars (military and trade), recessions, banking crises, currency crises, housing crises, geopolitical tensions, impeachments, assassinations, and even elections.
Case in point on a shorter period of time, Dr. Ed Yardeni, author of Dr. Ed’s Blog created list of 65 U.S. Stock Market Panic Attacks from 2009 – 2019 (see below). What have stock prices done over this period? From a low of 666 in 2009, the S&P 500 stock index has more than quadrupled to 3,030!
For the majority of this decade-long, rising bull market, the previously mentioned stool factors have created a tailwind for stock price appreciation (i.e., interest rates have moved lower, profits have moved higher, valuations have remained reasonable, and investors have stayed persistently nervous…a contrarian positive indicator). Investors may remain scared silly for a while, but as long as the four stock factors on balance remain largely constructive stock prices should continue experiencing a sugar high.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2019). Subscribe on the right side of the page for the complete text.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Glass Half Full or Half Empty?
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 1, 2017). Subscribe on the right side of the page for the complete text.
We live in a time of confusing dichotomies, which makes deciphering the flood of daily data quite challenging. In that context, determining whether the current economic fundamentals should be viewed from a glass half empty of glass half full perspective can be daunting.
More specifically, stock markets have again recently hit new all-time record highs, yet if you read the newspaper headlines, you might think we’re in the midst of Armageddon. Last month, the Dow Jones Industrial Average stock index eclipsed 21,000 and the technology-heavy NASDAQ index surpassed the psychologically important 6,000 threshold. In spite of the records, here’s a sampling of the steady stream of gloomy feature stories jamming the airwaves:
- French Elections – Danger of European Union Breakup
- Heightened Saber Rattling by U.S. Towards North Korea
- Threat of U.S. Government Shutdown
- First 100 Days – Obamacare repeal failure, tax reform delays, no significant legislation
- NAFTA Trade Disputes
- Russian Faceoff Over Syrian Civil War & Terrorism
- Federal Reserve Interest Rate Hikes Could Derail Stock Market
- Slowing GDP / Economic Data
Given all this doom, how is it then that stock markets continue to defy gravity and continually set new record highs? Followers of my writings understand the crucial, driving dynamics of financial markets are not newspaper, television, magazine, and internet headlines. The most important factors are corporate profits, interest rates, valuations, and investor sentiment. All four of these elements will bounce around, month-to-month, and quarter-to-quarter, but for the time being, these elements remain constructive on balance, despite the barrage of negative, gut-wrenching headlines.
Countering the perpetual flow of gloomy, cringe-worthy headlines, we have seen a number of positive developments:
- Record Breaking Corporate Profits: Profits are the chief propellant for higher stock prices, and so far, for the 1st quarter, S&P 500 company profits are estimated to have risen +12.4% – the highest rate since 2011, according to Thomson Reuters I/B/E/S. As I like to remind my readers, stock prices follow profits over the long-run, which is evidenced by the chart below.
Source: Trading Economics
- Interest Rates Low: With interest rate levels still near generational lows (10-Year Treasury @ 2.28%), and inflation relatively stable around 2%, this augurs well for most asset prices. For U.S. consumers there are many stimulative effects to lower interest rates, whether you are buying a house, purchasing a car, paying off a school loan, and/or reducing credit card debt. Lower rates equal lower payments.
- Potential Tax Reform: There are numerous stimulative components to the largest planned tax-cut in history. First of all, cutting the tax rate from 35% to 15% for corporations and small businesses (i.e. pass-through entities like LLCs and S-Corps) would place a lot of dollars back in the pockets of taxpayers and should stimulate economic growth. Other components of the White House proposal include the termination of the estate tax, the elimination of the AMT (Alternative Minimum Tax) targeted at wealthier households, and the doubling of the standard deduction to help middle-income families. All of this sounds great on paper, but not a lot of details have been provided yet on how these benefits will be paid for – removing state tax deductions alone is unlikely to fully offset revenue declines. The chart below highlights how high U.S. corporate income tax rates are relative to other foreign counterparts.
Source: The Wall Street Journal
- Business Spending & Confidence on the Rise: Ever since the 2008-09 Great Recession, the U.S. has been a better house in a bad neighborhood relative to other global developed economies. However, the recovery has been gradual and muted due to tight-fisted companies being slow to hire and invest. Although recent Q1 GDP economic data came in at a sluggish +0.7% growth rate, the bright spot embedded in the data was a +12% annualized increase in private fixed investment. This is consistent with the spike we’ve seen in recent business and consumer confidence surveys (see chart below). Although this confidence has yet to translate into an acceleration in broader economic data, the ramp in capital spending and positive business sentiment could be a leading indicator for faster economic growth to come. Stimulative legislation enacted by Congress (i.e., tax reform, infrastructure spending, foreign repatriation, etc.) could add further fuel to the economic growth engine.
Source: Trading Economics
- Economy Keeps Chugging Along: As the wealthiest country on the planet, we Americans can become a little spoiled with success, which helps explain the media’s insatiable appetite for growth. Nevertheless, the broader economic data show a continuing trend of improvement. Simply consider the trend occurring in these major areas of the economy:
- Unemployment – The jobless rate has been chopped by more than half from a 10.0% cycle peak to 4.5% today.
- Housing – The number of annual existing home sales has increased by more than +60% from the cycle low to 5.7 million units, which still leaves plenty of headroom for growth before 2006 peak sales levels are reached.
- Consumer Spending – This segment accounts for roughly 70% of our country’s economic activity. Although we experienced a soft patch in Q1 of 2017, as you can see from the chart below, we Americans have had no problem spending more to keep our economy functioning.
Source: Trading Economics
While key economic statistics remain broadly constructive, there will come a time when prudence will dictate the pursuit of a more defensive investment strategy. When will that be? In short, the time to become more cautious will be when we see a combination of the following occur:
- Sharp increase in interest rates
- Signs of a significant decline in corporate profits
- Indications of an economic recession (e.g., an inverted yield curve)
- Spike in stock prices to a point where valuation (prices) are at extreme levels and skeptical investor sentiment becomes euphoric
To date, there is no objective evidence indicating these dynamics are in place, so until then, I will remain thirsty and grab my half glass full of water.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
The New Abnormal – Now and Then
Mohamed El-Erian, bond manager and CEO of PIMCO (Pacific Investment Management Company, LLC) is known for patenting the terms “New Normal,” a period of slower growth, and subdued stock and bond market returns. Devin Leonard, a reporter from BusinessWeek, is probably closer to the truth when he describes our current financial situation as the “New Abnormal.” Accepting El-Erian description is tougher for me to accept than Leonard’s. Calling this economic environment the New Normal is like calling Fat Albert, “fat.” When roughly 15 million people are out of work, not receiving a steady paycheck, am I suppose to be surprised that consumer spending and confidence is sluggish?
Rather than a New Normal, I believe we are in the midst of an “Old Normal.” Unemployment reached 10.8% in 1982, and we recovered quite nicely, thank you, (the Dow Jones Industrial has climbed from a level about 800 in early 1982 to over 11,000 earlier in 2010). Sure, our economy carries its own distinct problems, but so did the economy of the early 1980s. For example:
- Inflation in the U.S. reached 14% in 1982 (core inflation today is < 1%) ;
- The Prime Rate exceeded 20%;
- Mexico experienced a major debt default;
- Wars broke out between the U.K./Falklands & Iran/Iraq;
- Chrysler got bailed out;
- Egyptian President Anwar Sadat was assassinated;
- Hyperinflation spread throughout South America (e.g., Bolivia, Argentina, Brazil)
As I’ve mentioned before, in recent decades we’ve survived wars, assassinations, currency crises, banking crises, Mad Cow disease, SARS, Bird Flu, and yes, even recessions – about two every decade on average. “We’ve had 11 recessions since World War II and we’ve had a perfect score — 11 recoveries,” famed investor Peter Lynch highlighted last year. Media squawkers and industry pundits constantly want you to believe “this time is different.” Economic cycles have an odd way of recurring, or as Mark Twain astutely noted, “History never repeats itself, but it often rhymes.” I agree.
Certainly, each recession and bear market is going to have its own unique contributing factors, and right now we’re saddled with excessive debt (government and consumers), real estate is still in a lot of pain, and unemployment remains stubbornly high (9.5% in June). Offsetting these challenges is a global economy powered by 6 billion hungry consumers with an appetite of achieving a standard of living rivaling ours. Underpinning the surge in developing market growth is the expansion of democratic rule and an ever-sprawling extension of the technology revolution. In 1900, there were about 10 countries practicing democracy versus about 120 today. These political advancements, coupled with the internet, are flattening the world in a way that is creating both new competition and opportunities. The rising tide of emerging market demand for our leading edge technologies not only has the potential of elevating foreigners’ standard of living, but pushing our living standards higher as well.
With the United States economy representing roughly 25% of the globe’s total Gross Domestic Product (~5% of the global population), simple mathematics virtually assures emerging markets will continue to eat more of the global economic pie. In fact, many economists believe China will pass the U.S. over the next 15 years. As long as the pie grows, and the absolute size (not percentage) of our economy grows, we should be happy as a clam as our developing country brethren soak up more of our value-added goods and services.
On a shorter term basis, Leonard profiles several abnormal characteristics practiced by consumers. Here’s what he has to say about the “New Abnormal”:
“The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies like Apple, whose net income jumped 94 percent in its last quarter, and Starbucks, which is enjoying a 61 percent increase in operating income over the same time frame, are thriving. Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers like Hermýs [sic] and Burberry are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S.”
Beyond the fray of high-end products, the masses have found reasons to also splurge at the nation’s largest mall (The Mall of America), home to a massive amusement park and a 1.2 million gallon aquarium. So far this year, the mall has experienced a +9% increase in sales.
So while El-Erian calls for a “New Normal” to continue in the years to come, what might actually be happening is a return to an “Old Normal” with ordinary cyclical peaks and valleys. If this isn’t true, perhaps we will all revert to a “New Abnormal” mindset described by Devin Leonard. If so, I will see you at the Mercedes dealership in my Burberry suit, with $3 latte in hand.
Read Devin Leonard’s Complete New Abnormal Article
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in Mercedes, BMW, Burberry, Hermy’s, SBUX, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Cockroach Consumer Cannot be Exterminated
We’re told that cockroaches would inherit the earth if a nuclear war were to occur, due to the pests’ impressive resiliency. Like a cockroach, the American consumer has managed to survive its own version of a financial nuclear war, as a result of the global debt binge and bursting of the real estate bubble. Although associating a consumer to a disease-carrying cockroach is not the most flattering comparison, I suppose it is okay since I too am a consumer (cockroach).
Confidence Cuisine
Cockroaches enjoy feasting on food, but they have been known to live close to a month without food, two weeks without water, and a half hour without air while submerged in water. On the other hand, consumers can’t live that long without food, water, and oxygen, but what really feeds buyer purchasing patterns is confidence. The April Consumer Confidence number from the Confidence Board showed the April reading reaching the highest level since September 2008. On a shorter term basis, the April figure measured in at 57.9, up from 52.3 in the previous month.
Where is all this buying appetite coming from? What we’re witnessing is merely a reversal of what we experienced in the previous years. In 2008 and 2009 more than 8 million jobs were shed and the fear-induced spiraling of confidence pushed consumers’ buying habits into a cave. With +290,000 new jobs added in April, the fourth consecutive month of additions, the tide has turned and consumers are coming out to see the sun and smell the roses. Recently the Bureau of Economic Analysis (BEA) revealed real personal consumption expenditures grew +3.6% in the first quarter – the largest quarterly increase in consumer spending since the first quarter of 2007.
Sure, there still are the “double-dippers” predicting an impending recession once the sugar-high stimulus wears off and tax increases kick-in. From my perch, it’s difficult for me to gauge the timing of any future slowing, other than to say I have not been surprised by the timing or magnitude of the rebound (I was writing about the steepening yield curve and the end of the recession last June and July, respectively). Sometimes, the farther you fall, the higher you will bounce. Rather than try to time or predict the direction of the market (see market timing article), I look, rather, to exploit the opportunities that present themselves in volatile times (e.g., your garden variety Dow Jones -1,000 point hourly plunge).
Will the Trend End?
Can this generational rise in consumer spending continue unabated? Probably not. To some extent we are victims of our own success. As about 25% of global GDP and only 5% of the world’s population, changing directions of the U.S.A. supertanker is becoming increasingly more difficult.
Source: The New York Times (Economix)
However, more nimble, resource-rich developing countries have fewer demographic and entitlement-driven debt issues like many developed countries. In order to build on an envious standard of living, our country needs to build on our foundation of entrepreneurial capitalism by driving innovation to create higher paying jobs. With those higher paying jobs will come higher spending. Of course, if uncompetitive industries cannot compete in the global marketplace, and a mirage of spending is re-created through drug-like credit cards and excess leveraged corporate lending, then heaven help us. Even the impressively resilient cockroach will not be able to survive that scenario.
Read full New York Times article here
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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