What Is Happening with the American Consumer in Our Economy?

What's going on with the consumer? Why does it matter? Why does it matter in the U.S. economy, but also why does it matter in the markets? These are the questions we’re tackling together in this month’s exclusive client presentation. As a note, we are doing so without the context of the upcoming presidential election. 

While there have been recent events that are certainly newsworthy, it is critical we don’t have this conversation first against the backdrop of politics. (Also, we will discuss the presidential election in a future presentation!)

Now, let’s dig in! 

Reviewing Our Investment Framework

Expected Returns

Let's look at our investment framework first, what do we see as we look at the world? Expected returns — you're going to hear me just say this over and over and over again — the expected returns over the next 10 years, we have a negative risk premium. 

So, if you looked at the S&P 500 and you measured out just purely based on math, what should the S&P 500 return for you over the next 10 years? The best expectations are somewhere between 3% and 4% a year, and you could go buy a 10-year U.S. Treasury bond and get 4.5% right now. That's kind of a negative risk premium where you can go get a 10-year U.S. Treasury bond — which is considered risk-free — as opposed to taking risk in the S&P 500 — which is far from risk-free — and gain more from the U.S. Treasury bond. 

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That's a negative risk premium, and it's very important because it tells you where you should put your money. Wealthy people just follow the trends of where you should put your money. If you can go make more money in guaranteed returns, go make more money in guaranteed returns. The expected return measurements are highly accurate. Our problem as humans, unfortunately, is that we're not patient enough to wait 10 years for it to be true. The expected returns measurement, that is what Warren Buffet was a master of. Buffet was a value investor and would buy a good company at a good price and hold it for a really, really long time. 

Business Cycle

The business cycle is the next thing we look at. Is the economy growing or is it contracting? Is inflation increasing or decreasing? And what we see now is that the economy is contracting. The U.S. economy is contracting. Leading indicators have been negative for about two years now, and the inflation is increasing. And that puts the Federal Reserve, which is the monetary policy, in a box. It really squeezes the Federal Reserve to decide are they going to fight inflation or are they going to support the economy? 

It leads us to monetary policy. The Federal Reserve is going to keep interest rates higher for longer or until something breaks. And that's kind of, I don't mind higher for longer, but higher for longer or until something breaks causes this concern.

Market Trends

Market trends have kind of moved to a neutral stance. The stock market reached new highs in the middle of last month. You probably saw some nice returns, but they have started to move negative in the last couple of weeks — and I cannot tell just yet. Is that just a summer swoon or is that kind of indicating something darker? 

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I got to tell you, the optimist in me thinks that it's just a summer swoon. And the good news is summer swoons typically only happen with healthy markets. And so when we look at all of this together, I could see two scenarios. I could see scenarios where the Federal Reserve is going to keep rates high until something breaks, or they're just keeping 'em higher for longer, which is putting pressure on markets around the world.

Let’s Talk About the U.S. Consumer

Labor Market

The consumer makes up about two-thirds of our nation's GDP, we've got to pay attention to the labor market. Full-time employees in the United States lost 2.5 million jobs in the last 12 months. Now, to be fair, the peak last year was June. So we're looking at June to June — but June of 2024 is on an upswing, which is optimistic now, but still the economy has lost 2.5 million jobs. 

Why is that? Many believe the COVID-19 pandemic simply removed about 5 million jobs from our economy never to return. So when I said at the beginning that we're dealing with some strange times and we're dealing with some cross currents, this is what I mean that we have unemployment near all time lows south of 4%. There was a time about 25 years ago that 5% was considered the max unemployment rate or the optimal unemployment rate for the United States that there would always be about 5% of the United States unemployed. And now we're south of 4%, and yet we're seeing 2.5 million jobs lost (maybe 5 million jobs lost) never to return because of a global pandemic. 

Inflation Complicates Matters

We’ve also had inflation. The price of gas has gone up, and the price of groceries have gone up tremendously. We've got three teenagers at home and our grocery bill is astronomical. Christie doesn't even tell me the number anymore. If unemployment is trending down, savings accounts are going to trend down because people are spending on their savings. The scary thing is savings accounts are at 3.6%, which is lower than the pre covid average of 6% of disposable income. 

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That means we're going now, we're going deep and U.S. credit card delinquencies are trending up. People have lost jobs, have spent their savings, and are spending more on credit cards in a time when goods and services are more expensive. That concerns me. And, based on history, what we believe we're seeing is the truth — that we're going to see some market and economic upheaval, and it very well could last the entire decade. This is why the standard 60/40 portfolio isn’t performing anywhere. 

Now, Some Good News

Part of the good news is this — I want you to remember, the nation goes through these ups and downs. And in the downtimes, it creates opportunity. For example, we think that international stocks have very attractive valuations compared to U.S. stocks.

We think that small caps provide a very attractive valuation. See, everything in the world has sold off drastically over the last four years except U.S. large cap stocks, right? Only Nvidia and Apple and Microsoft and Google and others like them — the magnificent seven, — those are the only ones that haven't just tanked. And actually some of those have tanked and are tanking.

Long-Term Opportunities

So, we believe that long-term opportunities fall in a couple of areas. We prefer international stocks, we prefer stock, we prefer small caps, and we prefer dividend growth stocks, we prefer quality. That is where we see areas of growth in the future. 

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For many of our retired clients, I want to have a conversation about high quality positions for you — and we are in an environment where we have relatively high interest rates. I'm saying relatively because some of you remember double digit interest rates. We're not in that kind of space, but we are in an interest rate environment where the highest we've seen in 20 years, which creates great opportunities for retirees.