Telemus Weekly Market Review July 24th - July 28th, 2023
Facts don’t care about your feelings, rings true in a lot of economic circles, but not according to Nobel Prize winner, Robert Shiller who argues in his book Narrative Economics, that often economic facts are driven by our feelings. Take today’s economy for example, an investor could make an argument that the U.S. economy is normalizing from COVID, inflation is cooling, and growth prospects are buoyed by a strong consumer. Alternatively, the Federal Reserve has been stepping on the breaks for nearly 1.5 years and implications of those policies have yet to be felt across the labor market, capex spending and ultimately the consumer. Last week we discussed the complexity of the current environment, and that ‘Quality’ companies are set to thrive in an uncertain world. But this week, let’s take a deeper dive into the engine of economic growth, the U.S. Consumer.
The U.S. Consumer drives nearly 17% of Global Gross Domestic Product and upwards of 68% of our domestic economy. Thanks in part to rising asset prices and a strong job market, U.S. Household assets are near an all-time high of $169 trillion! Compare that to aggregate consumer debt of $20 trillion and the balance sheet looks incredibly strong. Moreover, according to Moody’s, only 11% of consumer debt carries an interest rate that adjusts with market interest rates (compared to 25% in the Global Financial Crisis), in part because consumers locked in low mortgage rates over the last several years. In the same vein, if you look at household debt service, which is defined as total required household debt payments relative to total disposable income, it’s sub-10%. Where was it back in 2007/2008, you ask? – it was nearly 14% and today’s level is near the lows since the Federal Reserve began compiling data in the early 1980’s. This isn’t to say, cracks have yet to form – far from it. The delinquency rates by age cohort of both credit cards and auto loans are showing a steep rise in the younger population, which is particularly alarming for the former given assessed interest rates are 22%, according to the Federal Reserve and Haver Analytics. More recently, a survey of high-income individuals by the Federal Reserve Bank of New York and Haver Analytics suggests that meeting the minimum debt payment is becoming a worry, which would have significant consumer spending implications given that cohort disproportionately contributes to the overall metric.
Today, we are in the heart of second quarter earnings, and it’s evident that perceptions among corporate executives are driving their narrative as well:
“But as you look at it now, our customer spending patterns are now more consistent with pre-pandemic lower growth, lower inflation economy.” – Brian Moynihan (Bank of America) [YTD total payments was $2.1 trillion, a 5% uptick year-over-year, but down from the 13% growth rate last year]
“Similar to other retailers, we’ve been impacted by the rapid softening of the macro environment and a more cautious and value-driven customer. They are pulling back on discretionary and seasonal spend and responding strongly to promotional activity” – Rosalind Brewer (Walgreens Boots Alliance)
“We are trying to be really clear here, the consumer is in good shape, their spending down their excess cash. That’s all tailwinds. If we go into a recession, we’re going with rather good conditions, low borrowings, and good house price value, but the headwinds are substantial and somewhat unprecedented… I just think people should take a deep breath of that and we don’t know if those things will put us into a soft landing, mild recession or a hard recession.” – Jamie Dimon (JP Morgan Chase)
Under the backdrop of price momentum, an optimistic narrative has won so far in 2023, which is opposite to the events of 2022. But this in turn, may make the Federal Reserve’s fight against inflation both a tougher and a lengthier process. Looking ahead, the perception of narratives will continue having implications on market direction, yet we believe high quality companies should win over low-quality companies and market timing by investors will be an ill-fated strategy.
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