Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Q
Perspectives

Jun 15, 2022

Consumer perspectives of the economy are very dire. In fact, last week, consumer sentiment on their near-term view of their financial conditions dropped to the lowest level since the 1940s when the University of Michigan began taking this survey. The University of Michigan Consumer Sentiment index plunged to a record low of 50.2. In the report, consumers’ assessments of their personal financial situation dropped 20% in one month!

I wonder how the University of Michigan staff are contacting people since more people in the history of this country are getting up in the morning to go to work while another 11 million jobs remain vacant for anyone still looking for a job. My guess is the dire outlook comes from reaching people at home in the evening after a day’s work and seeing their paycheck for the first time in decades, buying less at the grocery store, and sticker shock at the gas station. Last week’s University of Michigan report indicated that 46% of consumer sentiment attributed to their negative views due to rising prices, with little confidence that inflation will slow anytime soon.

People’s perspectives are primarily influenced by three key factors; their small network of friends (Brashears survey in 2011 of 2000 people estimates that the average person has two close friends), their sense of wealth (change in account and house values), and the media.

When I look at the Consumer Sentiment chart above, I compare past economic cycles since the 1940s that did not affect consumers’ outlook nearly as dire as today. The closest reading to June’s historic 65-year low consumer sentiment reading was recorded in 1979.

Let’s consider 1979 for a minute.

  • Gas prices: Gas prices increased 37% from previous year's price of $0.63/gal to $0.86/gal that continued to rise another 86% to their peak in 1981 of $1.31/gal
  • Inflation: The CPI was 13.3%, an increase of 44% from the previous year
  • Interest Rates: Prime lending rate was 15.75% and climbed to 21.5% by December 1980
  • Mortgage Rates: National average 30 Year fixed rates were 11.2% rising to 13.88% by 1984
  • War: 52 hostages were captured in Iran in 1979 and ultimately held 444 days
  • Unemployment: Employers were slashing jobs, with unemployment at 6.0% and rising to 10.8% by 1982
  • Shrinking Economy: The US GDP had plunged 41% in four years, from 5.4% in 1976 to 3.2%. The decline continued with recessions recorded in Q1- Q2 1980 and six quarters from July 1981 to November 1982.
  • High Taxes. If you had a job earning more than $81,800, your federal income tax bracket was 68% (single) and 63% (married), and the top income tax bracket was 70% for anyone earning more than $161,000.

I remember all this doom and gloom being a recently married young man working at my father’s construction company in Marin County. My wife and I both had jobs (my wife a telephone lines person for Pacific Bell – yes, you read that correctly!?!), and by 1980 our first baby was on its way. We were remodeling our small house for our newest family addition. I bought it in 1978 with my parents with a 13% fixed mortgage rate. I remember watching the Iran hostage crisis on TV (yes, TVs were invented then) and years earlier sitting in gas lines on designated gas days (based on odd or even license plate numbers) to fill up my dad’s company trucks. Years earlier, in 1970, dad told me he was laid off again with six kids, and I would need to work with him doing odd jobs after school. Dad eventually named his company “Odd Jobs of Marin,” which grew into a small construction company renamed “Bayer Construction and Remodeling.” Our world in Northern California was not as bad as many other places in the US, but we were cognizant of the national issues and worries.

All these US and world challenges in 1979 and the University Consumer Sentiment was still above this month’s reading. I don’t discount the challenges people are currently facing. But I find it difficult to take the current dire consumer outlook seriously with near full employment, millions of people with sub-3 % fixed mortgage rates on their homes, rising inflation principally due to strong demand (because people have money), and temporary supply chain issues in food and gas, and federal tax rates (for now) at lowest levels in decades.

I agree with Wall Street strategist Marko Kolanovic, who was among the few that called the market bottom in March 2020. He stated this Monday on CNBC:

“We believe rates market repricing went too far, and the Fed will surprise dovish relative to what is now priced into the curve. The move-in market prices in more than enough recession risk, and we believe a near-term recession will ultimately be avoided thanks to consumer strength, COVID reopening/recovery, and policy stimulus in China.”

In the same interview, Mr. Kolanovic made the rare projection that,

“We expect markets to recover YTD losses in H2 [second half of 2022] to finish roughly flat.”

Jeremey Siegel, Wharton’s finance professor and author of the 1994 book “Stocks for the Long Run” stated this morning on CNBC,

“Through history, the S&P has beat the CPI by 4 to 5% a year. So really, it is way below its lag. So don’t forget, in the long run, the evidence is we will overcome that inflation with this stock index. It’s lagging in its historical performance…There may be a downside… but let me guarantee you that when this is over, the S&P will jump ahead of what the consumer price index is. That’s always the way it’s been historical.”

What Does This Mean to Me?

Is this a repeat of 1979? Let’s hope so. After consumer sentiment bottomed in 1979, the US economy struggled for a couple more years. However, in 1979 Paul Volker was appointed as Chairman of the Federal Reserve and immediately changed the committee’s policy and used aggressive discount rate increases to fight inflation (Authur Burns, previous Chairman, is widely criticized to have extended the 1975 recession with wild single rate swings by as much as 2%).  The Committee began a policy of consistent rate increases illustrated below that ultimately re-balanced the severely imbalanced economy to lower inflation and increase job growth.  

However, the stock market started to recover in 1980 and by the end of 1983, was up 72.14%.  

The rally continued for another 18 years, with the DJIA rising 1430% by the end of December 1999.

History provides insights and perspectives. While investors react to relevant concerns about inflation, interest rates, supply chain issues, and war compared to previous years, this period is not nearly as difficult. Even so, the more challenging previous eras ultimately recovered, and the US economy resumed its growth trend with rising stock market values. The one very important difference is the current strong US employment environment, which represents 66% of the economy. As China implements more restrictions on its society and businesses with a zero-tolerance policy on Covid (absolute nonsense) and many other countries, US companies are open for business and will continue to strengthen our country’s world economic influence with the availability of supplies and services.

Let us know your thoughts on this Brief and your views on the current state of our economy. Give us a call or send an email if you have any questions about your account or would like to discuss strategies to achieve your financial and personal goals. We welcome the opportunity to be of assistance.

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