As The U.S. Consumer Goes, So Goes The U.S. Economy

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As The U.S. Consumer Goes, So Goes The U.S. Economy

If you were to look at how the S&P 500 performed during the month of July without context from current events in the news, you would guess July was pretty boring.

As of this writing, the market had a minor sell off in the latter half of the month, but the broad market index essentially recouped those losses. The result? The S&P 500 was basically flat for the month of July, measured from beginning to end.

How could this be? Donald Trump was nearly assassinated. Joe Biden dropped out of the race and endorsed Kamala Harris. The drums of war continue to grow abroad. If this doesn’t prove the point that investors must separate the presidential election and politics from investment markets, I don’t know what else will.

What Matters for Investors Is The State of Businesses In The Stock Market, Not D.C. Politics

Do any of the recent headlines change the bottom lines of a business? No, not directly. Our government can apply policy that influences business profits for good or ill, but the effect is largely indirect.

What Has The Biggest Net Effect On Your Investment Portfolio?  

Answer:  spending by the American consumer.  Nearly 70% of the U.S. economy, as measured by Gross Domestic Product (GDP), is driven by personal consumption (Marketplace.org). Think of everything that you spend money on:  groceries, car payments, the mortgage, eating out, your Amazon orders, etc. Consumer spending is central to keeping the economy growing. As the old saying goes – as the U.S. consumer goes, so goes the U.S. economy.

Most Economists Predicted We Would Be In A Recession by Now

Not only has a recession not occurred, but American consumers keep spending and businesses continue to grow at an accelerating rate. The U.S. economy grew at 2.8% in the second quarter after an increase of 1.4% in the first quarter of 2024. While these percentages may seem small, going from 1.4% to 2.8% growth in one quarter is significant and has surprised many economists (Financial Times). In addition, the June 2024 inflation reading (CPI) was 3%. Inflation has been hovering around 3% for some time. As a reference, CPI was also at 3% in June of 2023 (CNBC)!

The Job Market Is Solid, Unemployment Remains Low, and Wages Are Steadily Growing

This is all to the good. What are some potential warning signs? Total credit card debt in the U.S. topped $1 trillion for the first time in history this year. Also, consumer confidence is trending lower, not higher (US Bank). Though total personal debt balances are a concern, it’s pivotal we understand this number on a relative basis.

On a percentage basis, the amount of household disposable income allocated towards debt payments is still relatively low and has remained steady since 2012. The chart below is a helpful view into the spending habits of Americans as it pertains to debt since the year 2000:

The American Consumer Remains Strong

In other words, though inflation has been a big concern (and rightly so), the increase in the costs of goods and services has not as of yet driven Americans into serious debt. 

On the contrary, Americans are still in a fairly strong financial position to weather potential future financial storms. Understanding this set of facts is central to also understanding why we have not entered into a recession. It’s also pivotal in understanding that our economic upside in the U.S. is very strong.

The Fed and Rates

The big variable is what the Fed chooses to do with interest rates. As of now, market participants are projecting an 89% likelihood that the Fed will cut rates by 0.25 in September (CME Group). This is what the market is pricing in. If this turns out to be true it would be the first rate cut since March of 2020 at the beginning of the Covid shutdowns.  Most investors at the end of last year also expected multiple rate cuts by summer of 2024, which has not happened, so we are skeptical of a September cut. As such don’t be surprised if the Fed waits until after the general election, or even early 2025, to start the process of cutting rates.

In light of This, How Are We Positioning Portfolios?

Two weeks ago we trimmed back some of our large cap positions as part of a normal rebalance and added a position focused on American industrial small cap companies (following the persistent trend of de-globalization and re-shoring business back to the U.S.). Last week large cap positions sold off somewhat, while small cap positions rallied. This is exactly what you would expect, and want to see, in a robust economy. The timing of our trades also worked out well for our clients.

What About Bonds?

We love individual bonds right now. For investors focused on asset preservation (as opposed to growth) this remains a once-in-a-generation time to lock in excellent rates in a bond portfolio for the medium or long term. We’ve been encouraging our conservative-oriented, risk-averse clients to get this done now before rates start to go down again. We can help with this.

Thank you for your ongoing trust in managing your portfolio and being a resource for your family’s long term financial plan.

by Jonathan Cameron, CFP®

 

Photo by Mike Petrucci on Unsplash

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