More than a few times, we here at Tematica have talked about the rising level of consumer debt across student and auto loans as well as credit cards. We’ve also talked about how older Americans are undersaved for retirement and how the upward trajectory in interest rates is going to make debt servicing more costly, crimping disposable income. In thematic speak that’s Middle-Class Squeeze with a helping of Aging of the Population.
But new data suggests consumers are aware of their situation and that is prompting them to cut back on their spending in order to save more. What we’ll have to see in the coming monthly Personal Income & Spending reports is to what degree they are opting to save vs. spend. In recent months, we’ve seen the personal savings rate reported by the Bureau of Economic Analysis slip to 3.6% in August from 6.9% in April, which took a minor bite out of personal spending.
If we see a more pronounced level of spending, it could be a headwind to an economy that is reliant on the consumer to open his or her wallet and spend. The silver lining if that comes about is those companies that we’ve identified as riding our Middle-Class Squeeze investing theme are likely to see a more favorable tailwind.
A new Bankrate survey finds that 66 percent of Americans are limiting their spending each month. Among those who are curbing their spending, 36 percent are doing so to save more money (24 percent of all respondents).
With more than 60 percent of Americans unable to cover a $1,000 emergency with savings, it’s good news that some are willing to sacrifice to start building cushions for the future.
Americans aren’t just limiting their spending to save: 24 percent of people who are limiting their spending are doing so because their income hasn’t changed, while 17 percent said they have too much debt. Another 11 percent are worried about the economy, and 5 percent are worried about the economy.
Households with incomes of $50,000 per year or more were more likely to say they needed to limit their spending to save. These households were also more likely to report being frugal, on a budget or having no desire to spend more money. They were less likely to cite stagnant income than households with income under $50,000 per year.
Meanwhile, households with income under $30,000 per year had the highest likelihood (13 percent) of citing their worries about the economy as the top reason for limiting spending.
… older Americans aren’t showing the same dedication to saving. Stagnant income was the top response for baby boomers (34 percent) and the Silent Generation (49 percent).
For a generation that is still working, flat-lining wages brings concern. In 2017, the labor force of Americans ages 55 and up accounted for about 23 percent of the average annual labor force. By 2024, the Bureau of Labor Statistics estimates that percentage will increase to almost 25 percent.
Tematica’s Chief Macro Strategist Lenore Hawkins has been rather vocal on the two issues hitting the domestic housing market – a lack of supply and escalating prices that are shrinking the pool of potential buyers.
While one would think homebuilders would respond with more affordable housing, they are also contending with increases to their own cost structure as commodity prices for steel, aluminum, copper and lumber rise. Some of that increase can be traced back to tariff and trade talks, but given limited supply of these materials there is also the Rise of the New Middle Class factor as well.
Usually when there is a paint point such as this, there is or tends to be an eventual solution. This has and will hold true as well, but it likely means the housing multiplier effect on the economy won’t be what it was in the past… and that’s not counting the demographic impact to be had associated with our Aging of the Population investing theme.
Lest I forget, prospects for continued housing price increases will add wood to the inflation hawk fire. Team Tematica will be looking for signs of this not only in the regular data we watch, but also in the Fed’s comments.
After losing over a third of their value a decade ago, which led to the financial crisis and a deep recession, U.S. house prices have regained those losses.
But supply has not been able to keep up with rising demand, making homeownership less affordable.
Annual average earnings growth has remained below 3 percent even as house price rises have averaged more than 5 percent over the last few years.
The latest poll of nearly 45 analysts taken May 16-June 5 showed the S&P/Case Shiller composite index of home prices in 20 cities is expected to gain a further 5.7 percent this year.
That compared to predictions for average earnings growth of 2.8 percent and inflation of 2.5 percent 2018, according to a separate Reuters poll of economists. [ECILT/US]U.S. house prices are then forecast to rise 4.3 percent next year and 3.6 percent in 2020.
A further breakdown of the April data showed the inventory of existing homes had declined for 35 straight months on an annual basis while the median house price was up for a 74th consecutive month.
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On this week’s podcast, Tematica’s investing mixologists Chris Versace and Lenore Hawkins breakdown the latest economic and market news and share what it means through Tematica’s thematic investing lens.
As we move deeper into 3Q 2017 earnings season, results from IBM (IBM), General Electric (GE), Honeywell (HON) and others suggest we could be in for a rougher ride ahead compared to the Teflon market’s melt up over the last several weeks. Volatility remains depressed with the market at richer than rich valuations, and 3Q 2017 earnings could be the spark that leads the stock market to revert to the mean. That likely means the domestic stock market giving back some of its recent gains off the August lows.
We also point out signals for our Connected Society, Cashless Consumption, Fattening of the Population, Food with Integrity and Safety & Security investing themes are paving the way for investable opportunities that are poised to become supercharged in the weeks and months ahead.
We also review what we see happening in the markets and what the latest economic data reveals as well as share what we’ll be watching in the week ahead.
Companies mentioned on this podcast
- Adobe Systems (ADBE)
- Alphabet (GOOGL)
- Amazon (AMZN)
- American Express (AXP)
- Apple (AAPL)
- Coca-Cola (KO)
- Comcast (CMCSA)
- Costco (COST)
- Disney (DIS)
- Facebook (FB)
- General Electric (GE)
- Honeywell (HON)
- IBM (IBM)
- Insulet (PODD)
- International Flavors & Fragrances (IFF)
- MasterCard (MA)
- Netflix (NFLX)
- PepsiCo (PEP)
- Proctor & Gamble (PG)
- SAP (SAP)
- Snap (SNAP)
- Twitter (TWTR)
- Visa (V)
Resources for this podcast:
- Chris Versace – @_ChrisVersace
- Lenore Hawkins – @EllesEconomy
- Tematica Research – https://www.tematicaresearch.com
- Themes Report: https://www.tematicaresearch.com/whatisthematicinvesting
- Cocktail Investing: Distilling Everyday Noise into Clear Investment Signals for Better Returns
Books we’re currently reading:
As we all know by now, the Fed exited its September monetary policy meeting yesterday. Chairwoman Janet Yellen said that in the Fed’s view, the domestic economy is on solid enough footing to handle another Fed rate increase before the end of the year as well as the initiation of the Fed’s plan to unwind its $4.5 trillion balance sheet. This view effectively brushes aside the fact that the Fed’s inflation target has yet to be realized, despite its herculean monetary policy efforts, and in the near-term, the economy is headed for a tumble following hurricanes Harvey and Irma, and maybe more depending on how Hurricane Maria develops.
In recent days, we’ve seen several cuts to GDP expectations for the current quarter, including from the Atlanta Federal Reserve as well as several investment bank economists. The general thinking is that Hurricanes Harvey and Irma trimmed roughly 1% off of economic activity. With the bulk of the damage coming in September, including what we have yet to experience with Maria, we’ll have a fuller sense of the trifecta’s extent in October when we get the September data.
The market reaction to the FOMC statement is that it was more hawkish than what had already been priced in. While the market was priced at a 50/50 chance for a rate hike before the end of the year, the now infamous dot-plot shows that 12 of the 16 members expect one more hike this year, with one expecting two. In sharing the committee’s view Chairwoman Yellen remarked, “The median projection for the federal funds rate is 1.4 percent at the end of this year, 2.1 percent at the end of next year, 2.7 percent at the end of 2019, and 2.9 percent in 2020.”
This means the next rate hike, which is now likely to occur in December, will be a quarter point in nature, and based on the Fed’s forecast the three targeted rate hikes in 2018 are likely to be of the same magnitude. As Yellen shared this, she once again cautioned the Fed will remain “data dependent” in its thinking. As the markets recalibrate from a 50% likelihood to the new 70% that we will see another hike in 2017, gold lost $10 per ounce, the dollar gained some strength and the yield on the 2-year rose 4 basis points while the long bond has barely moved, flattening the yield curve.
From our perspective, with a recovery that is increasingly long in the tooth (something that is not likely lost on Yellen and the Fed heads), we see the Fed looking to regain monetary stimulus firepower ahead of the next eventual recession. To be clear, we’re not calling for one, just recognizing that at some point one will happen – it’s the nature of the business cycle. As we share that reality, we’d also note that historically the Fed has a very good track record of boosting rates as the economy heads into a recession.
We’d like to point out that while most are viewing these minutes as more hawkish than expected, the phrasing of their economic analysis has become more sedate. Oh for the days when we didn’t need to analyze every little word out of the Fed like a bunch of teenagers assessing the meaning of their crush’s every utterance! The Fed’s assessment of unemployment has dropped the reference to “has declined,” leaving just “unemployment rate has stayed low.” With respect to spending, the wording has gone from “continued to expand” in July to “expanding at a moderate rate.” As for the dot plots, of the four FOMC members who expected two more hikes in 2017, only one remains.
As much as the Fed will likely try to avoid that and preserve Yellen’s time as chairwoman, it’s different this time. Next month, the Fed will begin unwinding its balance sheet that bulked as a result of its quantitative easing measures. The Fed admits to “months of careful preparation,” but let’s be real here, this is unlike anything we have seen before as the Fed expects to boost interest rates further. Yes, the Fed will baby step with its balance sheet as its targets selling no more than “$6 billion per month in Treasuries and $4 billion per month for agencies” in 2017. In 2018, however, those caps will rise to “maximums of $30 billion per month for treasuries and $20 billion per month for agency securities.” Given the Fed’s balance sheet weighs in at a hefty $4.5 trillion, this is poised to be a lengthy process and we suspect that as well intended as the Fed’s thinking on this is, odds are there are likely to be some unintended consequences.
The question we continue to ponder is whether the economy is strong enough to not falter as the Fed ramps its selling while boosting rates. Even the Fed sees GPD falling from its 2.4% forecast this year to “about 2 percent in 2018 and 2019. By 2020, the median growth projection moderates to 1.8 percent.” To get to that 2.4%, we need the Atlanta Fed’s GDPNow forecast for 2.2% in Q3 to materialize, which we think is going to be tough given the impact of this season of insane storms, as well as at least a 3% bump in Q4. Our bets are that’s about as likely as either of us giving up chocolate.
As we mull this forecast vs. the business cycle, we must keep in mind the Fed is ever the cheerleader for the economy and tends to be optimistic with its GDP forecasts. We prefer to be Rhonda Realist vs. Debbie Downer or Cheery Charles, and when we triangulate the Fed’s comments, we continue to think it’s underlying strategy is to re-arm itself for the next downturn.
Despite yesterday’s move higher in the stock market, March to date has seen the Dow Jones Industrial Average move modestly lower with a larger decline in the Russell 2000. Only the Nasdaq Composite Index has climbed higher in March, bringing its year to date return to more than 9 percent, making it the best performing index thus far in 2017. By comparison, the Dow is up 4.75 percent, the S&P 500 up 5.35 percent and the small-cap heavy Russell 2000 up just 0.75 percent year to date.
So what’s caused the move lower in the stock market during March, bucking the upward trend the market enjoyed since Election Day 2016?
Despite the favorable soft data like consumer confidence and sentiment readings, investors are waking to the growing disconnect between post-election expectations and the likely reality between domestic economic growth and earnings prospects. Fueling the realization is the move lower in 1Q 2017 earnings expectations for the S&P 500, per data from FactSet, as well as several snafus in Washington, including the pulling of the vote for the GOP healthcare plan. These have raised questions about the timing and impact of President Trump’s stimulative policies that include infrastructure spending and tax reform.
We’ve been steadfast in our view that the earliest Trump’s policies could possibly impact the US economy was late 2017, with a more dramatic impact in 2018. On a side note, we agree with others that would have preferred to have team Trump focus on infrastructure spending and tax reform ahead of the Affordable Care Act. As we see it, focusing on infrastructure spending combined with corporate tax reform first would have boosted confidence and sentiment while potentially waking the economy from its 1.6 to 2.6 percent annual real GDP range over the last five years sooner. We’d argue too that that would have likely added to Trump’s political war chest for when it came time to tackle the Affordable Care Act. Oh well.
So here we are and the enthusiasm for the Trump Trade is being unraveled as growth slows once again. As depicted above, the most recent forecast for 1Q 2017 GDP from the AtlantaFed’s GDPNow sits at 1.0 percent compared to 1.9 percent for 4Q 2016 and 3.5 percent in 3Q 2016. Even a grade school student understands the slowing nature of that GDP trajectory. Despite all the upbeat confidence and sentiment indicators, the vector and velocity of GDP forecast revisions and push outs in the team Trump timing has led to to the downward move in S&P 500 EPS expectations for the current quarter and 2017 in full.
With Americans missing bank cards payments at the highest levels since July 2013, the delinquency rate for subprime auto loans hitting the highest level in at least seven years and real wage growth continuing to be elusive, the outlook for consumer spending looks questionable. Factor in the aging of the population, which will have additional implications, and it looks like the consumer-led US economy is facing more than a few headwinds to growth in the coming quarters. These same factors don’t bode very well for the already struggling brick & mortar retailers like Macy’s, Sears, JC Penney, Payless and others.
Now here’s the thing, currently, the S&P 500 is trading at 18x 2017 expectations —expectations that are more than likely to be revised down than up as the outlook for U.S. economic growth in the coming quarters is revisited. In three days, we close the books on 1Q 2017 and before too long it means we’ll be hip deep in corporate earnings reports. If what we’ve seen recently from Nike, FedEx, General Mills, Kroger and Target is the norm in the coming weeks, it means we’re more likely to see earnings expectations revised even lower for the coming year.
While it’s too early to say 2017 expectations will be revised as steeply as they were in 2016, (which started the year off with the expectation of a 7.6 percent increase year over year but ended with only a 0.5 percent increase following 4Q 2016 reporting), but any additional downward revisions will either serve to make the market even more expensive than it currently is or lead to a resumption of the recent downward move in the market. Either way, odds are there is a greater risk to the downside than the upside for the market in the coming weeks.
Buckle up; it’s bound to get a little bouncy.