Consumer Driven Economy Powers On

We have mentioned in past Weekly Briefs about the dynamics of our current multi-speed economy. Some sectors are doing (travel, retail, hospitality) while others are not doing so well (lending, banking, and commercial office). The majority (66%) of the US economy GDP is driven by consumer spending for staples and discretionary items while the other 33% is government, non-profit, and corporate spending.
Today the University of Michigan released their US consumer sentiment index that increased to 63.9 in June and the highest in four months. Consumers have improved their sentiment due to easing of concern of inflation, recession, and government debt ceiling crisis. The University’s consumer confidence index also jumped in June 7.2 points to 109.7 and the highest reading in 18 months. A reading below 80 is an indication of a potential recession in the next year.

Surveys of Consumer director, Joanne Hsu, had this comment about this month’s Consumer Sentiment:

"Consumer sentiment is now 28% above the historic low from a year ago and may be resuming its upward trajectory since then."

Trading Economics made this observation of the Consumer Sentiment report and provided the chart below:

“In June, improvements were seen in both current economic conditions (68 vs 64.9) and consumer expectations (61.3 vs 55.4). Also, year-ahead inflation expectations receded for the second consecutive month to 3.3%, the lowest since March 2021, from 4.2% in May. In contrast, long-run inflation expectations were little changed from May at 3%.”

As illustrated above, the Consumer Sentiment index is well below its three-year peak but has been slowly recovering from lows reached last year due to interest rates going up while the stock market was going down. However, since the start of the year, consumers seemed to be getting comfortable with the new interest rate economy and projections of a recession in early 2023 appear unrealistic.  Further helping households are locked in low mortgage rates and unemployment remains at 50-year lows with more jobs than available workers.

After the Great Recession ended in early 2009, Consumer Sentiment was on a steady rise from multi-decade low.  However, the 2020 worldwide pandemic crisis followed by several years of Draconian government policies strained consumers who lost their confidence in the economy and on their personal financial future.  The Consumer Sentiment index plummeted to record lows not seen during the past 73 years the University has been providing these reports.  The index in 2020 dropped below readings in the late 1970’s with double digit inflation and while Paul Volcker, then Federal Reserve Chairman, was raising interest rates at a pace never experienced who ultimately pushed the Prime Lending rate to an unbelievable 21.5% on December 19, 1980!  For reference, the current Prime Lending rate is 8.25%.

Like former Chairman Volcker, current Chairman Jerome Powell initiated an aggressive interest rate hike policy March 2022 to fight inflation which principally impacted credit markets and those that needed new or refinance loans.  Many businesses in 2022 apparently were financially sound or had stable loans as they continued to grow and increase their employee count.  Unemployment remained stable during the Federal Reserve rate hike campaign and a key to why Consumer Sentiment is recovering from last year's low.

WHAT DOES THIS MEAN TO ME?

We are days away from closing out the first half of 2023.  The stock market has surprised many investors with a strong rebound from last year’s selloff.  Currently, the S&P 500 is well above its 50 Day Moving Average (DMA) and more importantly its 200 DMA.  As mentioned in previous Weekly Briefs, the S&P 500 is on a positive trend and picking up momentum as indicated by the faster rise of the index to its past 50 and 200 day averages.

All the major indices have positive returns through today.  NASDAQ, the 2022 biggest loser of the group has bounce back strong in 2023 up 29.52% YTD through today. 

Notice on the chart above the significant slower gains for the S&P 400 (Mid-Cap) and S&P 600 (Small Cap) indices.  Historically, when one or more index is trailing its peers, it is developing a buying opportunity.  This is particularly helpful as value of one sector are getting high there is the opportunity to rebalance by selling some of the high value stocks (leaders) for the low value stocks (laggers). 

Currently our growth allocations are heavily focused on technology with positions in Apple (APPL), Nvidia (NVDA), Invesco QQQ Trust (QQQ), and Technology Select Sector (XLK).  There may be an opportunity within the next 12 – 24 months to take profits from the fast-rebounding technology sector and invest in the trailing sectors of small and mid-cap index Exchange Traded Funds (ETF). 

After a strong second quarter, we would anticipate the stock market to lag or even sell off a bit during the summer months.  However, the stock market may rally in the fourth quarter with positive consumer sentiment and holiday retail sale forecasts.

Let us know your thoughts on this Weekly Brief.  Also, give us a call to review your account as we anticipate the summer months to be a period of re-balancing and preparing for what we believe will be a positive fourth quarter for the stock market.