Consumers Spending More in History

CNBC reported today that consumers are spending more this year than in recorded history. Based on a survey conducted by CNBC, Consumers have increased their holiday spending by 31% over 2022 based on their survey. The average household holiday spending has ballooned to $1300 this year.

The key rationale given for spending more is due to salary increases. However, the actual reason is consumers have more to spend. What consumers are really benefiting from is an increase in their discretionary savings, which is the difference between their net after-tax income vs expenses.

Even if incomes are higher than the year before, if living expenses increase faster than their income, their net discretionary spending would be reduced. Consumers have benefited from the Federal Reserve's successful rate increase campaign that slowed inflation from approaching double digits in 2022 to the mid-3 % range now in 2023.

An additional benefit for homeowners across America is their sub-4 % fixed mortgage rates. Millions of families have long-term stability with their budgets, knowing that the cost of paying for their home will not change for decades. The opposite was true during the first decade of this century when home ownership came at the cost of having Adjustable-Rate Mortgages (ARM) that offered low monthly starter payments for the first 24 to 36 months. What was not well disclosed, as we all learned in 2008, is that many of the ARM mortgages' mortgages' low payments did not cover the cost of the loan, and their principal balances actually increased during the introductory period. The most damaging to households that contributed to the financial crisis was the lack of stability in their mortgage payments. After the introductory loan period ended, monthly payments jumped to the scheduled loan payment that, for many, was 30% to 50% higher than their previous starter payments.

These ticking time bombs in homeownership with ARM don't exist for most homeowners now and are a key factor to stability in the US economy.

What have analysts confused about the robust increase in this year's holiday spending is consumers are actually quite pessimistic about the economy and their future financial situation. Consumer sentiment was recovering in the first quarter of this year; then, after a huge drop in May, it bounced back to new year highs in July only to slowly fade to nearly new record lows in November.

In fact, consumers this year have not been this pessimistic since the Great Recession in 2008. After consumer sentiment rallied back in 2009 to near all-time highs reached in January 2020, sentiment dropped like a rock due to the coronavirus, reaching lows in recorded history and only moderately improving.

Below is the entire chart of the University of Michigan's Consumer Sentiment Index since the University of Michigan began issuing these reports in the late 1940s devised by Professor George Katona. It is intriguing to consider why consumers are so pessimistic even below years of seemingly greater calamity since the 1940s that included the aftermath of WWII, President Kennedy's assignation, the Vietnam War, the OPEC oil crisis, 1970s hyperinflation, President Nixon's impeachment, and Iran hostage crisis to name just a few.

Even more perplexing is why consumers are spending so much.

One answer may be they have money to spend. Forbes reported in June 2023 that household savings soared from 2020 to 2021 to over 35% of disposable income. People benefited and apparently saved some of the trillions of government and employer subsidies. As these programs wound down in late 2022, so did household savings. However, as of June 2023, households have, on average, $65,100 in personal savings, according to a 2023 Financial Planning & Progress study from Northwestern Mutual, even though personal savings have dropped to 4.1% of disposable income.

Another possible clue to the rise in holiday spending is the increased utilization of Buy Now Pay Later (BNPL) providers. Companies like Afterpay, Affirm Holdings (AFRM), and Klarna offer consumers the ability to spread the cost of purchases over months with interest rates ranging from 0% to 36%. Nearly 25% of adults have used BNPY programs, and over Black Friday, BNPY accounted for 7.2% of all purchases, which is an increase of 25% over 2022. BNPY accounts are easy to set up with typically limited underwriting requirements. Most appealing for consumers is that BNPY providers typically do not report to major credit organizations, even if one falls behind in payments.  

WHAT DOES IT MEAN TO ME?

The good news is holiday consumer spending appears to be at a record pace. This could be good news for the stock market, especially if retailers report strong Q4 2023 earnings in January. Good earning reports may stoke investor optimism for the start of 2024. Investors may rally the stock market in 2024 due to the combination of low interest rates, stable consumer spending, low unemployment, rising corporate earnings, and a Congressional stalemate during a presidential election year. However, we need to see how holiday sales wrap up (pun intended) for 2023 and if retailers have rising profits for this holiday season. In the past, retailers have reported record sales but, due to huge discounts, ultimately disappointed investors with below-expected earnings.

All major indices have bounced back to new-year highs since bottoming on October 27. The rally in all four major indices indicates that investors are spreading their investing dollars across a wide range of sectors.

NASDAQ, representing the technology sector, is still the leading index. However, the real story for 2023 is the "Magnificent Seven" represented by Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA), and Meta Platforms (META). These seven stocks have soared an average of 75% in 2023 through yesterday. Remove these stocks from the S&P 500, and the remaining 493 stocks have increased an average of 12% for 2023

Thankfully, we have AAPL and NVDA in several of our private client model portfolios that have provided an added boost in returns.

Let us know how we can be of assistance to you and your family as you prepare for 2024. We welcome the opportunity to meet you and learn more about your goals. In the meantime, everyone at Up Capital Management wishes you a merry Christmas and wishes that 2024 will be your best year ever.