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Look and see which way the wind is blowing before you commit.” – Aesop, Aesop’s Fables.
Stocks enjoyed a nice little rebound last week as markets ended August on a good note. Unsurprisingly, the tech-heavy Nasdaq (COMP.IND) was at the forefront of the advance, fueled by great earnings from companies like Nvidia Corporation (NVDA), Salesforce, Inc. (CRM) And Splunk (SPLK)the upcoming iPhone 15 release of Apple (A`L) and enthusiasm for artificial intelligence (“AI”) in general. The rest of the market is lagging behind, as it has been throughout 2023.
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Big Tech is currently driving the rally. However, about 70% of economic activity has been consumed by consumers and consumer health appears to be deteriorating rapidly. If this trend does not reverse, it is also difficult to see that the economy or stocks will be fine for the rest of 2023.
How bad is it for the average consumer when inflation hits its four-decade high? First, let’s start with some anecdotal evidence. According to the latest LendingClub Opinion poll In July, 61% of all Americans are living paycheck to paycheck. This is up from 59% in July last year when inflation was much higher.
Moreover, this is now the case for the majority of Americans revolving debt instead of paying off the amount in full, which is the first time this has ever happened. Total credit card debt also recently surpassed $1 trillion for the first time. 401K hardship loans are also up 36% year over year, according to Bank of America.
The average mortgage rate recently hit its highest level since 2001. Combined with a lack of inventory (as few want to give up their 3% mortgage rate), housing affordability has fallen to its lowest level in almost four decades. Those headwinds for the consumer were evident this quarter in disappointing earnings reports from Macy’s (M), Dick’s Sporting Goods (DKS) and a host of other retailers. It was Thursday Dollar General’s (DG) is set to become the retail sector’s disaster du jour with its own dismal second quarter report.
More importantly, the job market appears to have deteriorated in recent months. Earlier this week, in July JOLT’s job report showed only 8.83 million job vacancies, which fell well short of expectations. The estimates for job vacancies in the previous month were also corrected significantly downwards. This was the first figure below nine million in almost two and a half years. In addition, job vacancies have fallen by 1.5 million in three months, which has only happened once on record, during the coronavirus lockdowns.
The July BLS jobs report showed nearly 600,000 full-time jobs were lost during the month. Job growth was only positive this month due to a huge increase in part-time jobs. A similar trend was observed for BLS jobs in August report this morning. The headline read: 187,000 jobs were added last month, slightly exceeding expectations. However, there were a net 225,000 new part-time jobs, meaning full-time employment fell by 38,000 over the month. In addition, the employment figures for July and June were revised significantly downwards. Again, this is part of a trend this year as each first monthly place value in 2023 has been revised downwards in subsequent months.
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Layoffs are also increasing. US-based employers have announced, according to Challenger, Gray & Christmas plans In 2023, 557,057 job cuts are planned so far, up 210% from the 179,506 job cuts announced in the same period last year. The deterioration of the labor market could be a major reason for this Consumer Confidence in August came in well below expectations on Tuesday, while the July reading was also revised down.
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Nor can savings be expected to support the deteriorating consumer situation. Excess savings ($2.1 trillion) are gone from all Covid stimulus measures, according to JPMorgan. In addition, the savings rate fell to 3.5% in July from 4.3% in June (lower than during the financial crisis). This is down from 7.3% before the pandemic. Strong retail sales in July were supported by overall personal savings drop from $852 billion to $706 billion. The outlook for consumer spending is also unlikely to improve in the coming months, amid looming $75 billion in annual headwinds from student loan repayments resuming (after a more than three-year taxpayer-funded pause).
JP Morgan Equity Research
Additionally, the manufacturing sector has been in declining territory on a monthly basis throughout 2023 PMI reports I’ve been consistently below the 50 mark for ten straight months now. The monthly leading indicators for the economy have also fallen for 16 months in a row.
The Conference Board
So can the economy continue to grow and markets thrive if both the consumer and manufacturing sector suffer? To me, that’s like asking if a car with three of its four wheels losing air can maintain its speed. Because of this, my portfolio is positioned very cautiously, as I recently wrote in an article entitled “Shadows of 2007“Until the consumer outlook improves, I’m largely sticking to safe-haven, conservative assets like short-dated government bonds, as I can’t be positive about the market when a segment that makes up 70% of the economy is trending down at an accelerated pace.
Mixing old wine with new wine is stupidity, but mixing old wisdom with new wisdom is maturity.” – Amit Kalantri.
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