Doubling Down on Digital Infrastructure Thematic Leader

Doubling Down on Digital Infrastructure Thematic Leader

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Adding two Middle-class Squeeze call option positions ahead of earnings this week

Adding two Middle-class Squeeze call option positions ahead of earnings this week

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Weekly Issue: Factors making the stock market melt up a head-scratcher

Weekly Issue: Factors making the stock market melt up a head-scratcher

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Consumer Confidence & LEI’s Flash Warning

Consumer Confidence & LEI’s Flash Warning

Consumer Confidence for September declined a bit more than expected, falling to 119.8 from 120.4, versus expectations for a decline to 120. While that doesn’t sound all that meaningful as it is still well above the long-term average of 93.9, we see something occurring beneath the headlines that warrants further attention and is particularly concerning – relative confidence levels by age group.

 

As one would expect, confidence among younger consumers is almost always better than amongst older consumers, (less time alive means less time for regrets and a perception of more time to accomplish one’s goals) which is why this month’s Consumer Confidence report is so remarkable. This month middle-aged consumers, those 35-54 years of age, have a higher level of confidence at 128.2 than younger consumers, those under 35 years of age, who have dropped to 120.9 from 126.6. This divergence is quite rare, but even more concerning is the magnitude of the reversal. Going all the way back to 1980, the negative 7.1 spread in confidence between those middle-aged and those in the younger cohort has never been greater. The low rates of household formation coupled with the well above average rates of college grads living with mom and dad put the Millenial generation deep in our Cash Strapped Consumer investing theme.

 

We also saw something with respect to confidence levels by income that could be a concern for the current administration. While confidence levels for consumers with incomes over $50,000 and those with incomes under $35,000 rose, confidence for consumers with incomes between $35,000 and $50,000 dropped to the lowest level since last October. Given that a large portion of President Trump’s base is in that cohort, don’t expect to see an improvement is his approval ratings anytime soon.

For investors, this means that President Trump may have an even more difficult time passing the legislation he promised on the campaign trail. Low approval ratings make it less appealing for legislators to reach across the aisle and increase the perceived potential risk versus reward for those in his own party to be staunch supporters of any Trump-led legislation. Repeal/replace of Obamacare and tax reform, let alone that much-promised infrastructure spending is more challenging when fewer and fewer support the current administration.

 

The Consumer Confidence report also revealed weaker plans to spend, with autos falling to a 14-month low and housing dropping to 6.9 from 7.3. On the other hand, the trend to remodel versus trade up continues as plans to buy a major appliance jumped to 54.0 from 50.5, the highest level since May 2009. This bodes well for shares of Home Depot (HD) and Lowe’s (LOW).

 

The Chicago Fed National Activity Index (CFNAI) gave us ample cause for concern as 50 of the 85 variables it measures across the national economy were in contraction mode for August with the 3-month moving average dropping to -0.04 in August from +0.15 in June. Personal Consumption & Housing was in the red at -0.06 and has now been negative for 123 consecutive months – more evidence of our Cash Strapped Consumer.

 

Finally, the ECRI leading index smoothed growth rate has fallen for seven consecutive weeks, stalling last week after having growth at nearly a 12% pace at the beginning of 2017. We haven’t seen growth this weak since March of 2016.

 

The bottom line is we see a continued disconnect between sentiment, the hard data and the market’s enthusiasm coupled with a profound “meh” when it comes to political and geopolitical risks. However, as we noted earlier, expensive stocks can get more expensive and the market isn’t giving us any signs of an imminent reversal, particularly as we see an increasing number of stocks moving above their 50-day moving averages.