The American Consumer and the Economy
We as a nation recently met the one year anniversary of Coronavirus lockdowns, where the economy, turning on a dime, effectively shut down. The data that followed revealed many areas of our economy that were affected both expected and unexpected. Graphs that were released revealing unemployment, consumer spending, among other statistics were nothing short of staggering. Consumer spending accounts for about 70% of our economy, and the level of that spending that evaporated essentially overnight reveals how impactful Americans going out spending our money is to our overall economy. [1] The context of this is important, and begs the question of how we as a nation reached this status, and what implications that our spending holds as it relates to the economy as a whole.
❖ Coincidentally, after the last outbreak that our country experienced in the 1918 Spanish Flu, Americans were clamoring for an opportunity to go out and enjoy themselves and find some outlet to release the stresses of the pandemic, which commonly meant going out and spending money after two years of battling the pandemic (Sound familiar?).
❖ A major catalyst in this behavior was the rise of consumer credit. Author Robert Gordon estimates that “by the end of the 1920s consumer credit financed 80-90% of furniture sales, 75% of washing machines, 65% of vacuums, 25% of jewelry and 75% of radios.” [2]
❖ Consumer spending encompasses more than one may have initially assumed. Components of consumer spending include: “Durable goods – cars, furniture, large appliances. Non-durable goods – clothing, food, fuel. Services – banking, health care, education.”[1] With this considered, consumer spending clearly has an impact on multiple sectors in the GICS, despite the existing designated components of consumer discretionary and consumer staples. This speaks to the aforementioned figure of consumer spending constituting 70% of our economy.
❖ What does this mean as it relates to portfolio allocation, considering the parallels between now and The Roaring Twenties following the Spanish Flu? While of course the American economy has since matured in comparison, the similarities between consumer sentiment then and now are unmistakable. We still have a penchant for using credit, going out to spend money, and many Americans’ pockets are lined with a fresh stimulus of $1,400 or more as a result of unprecedented measures by our government in response to the pandemic.
❖ As LPL research has projected, throughout the remainder of this year, “as the economy makes additional progress toward a return to normal in the coming year, and the areas hit hardest by the pandemic begin a more robust recovery, we would expect participation in this young bull market to broaden and potentially help boost some of the more economically sensitive laggards on the value-style side.” [3] This forecast alludes to the sectors that had been affected by the pandemic, coupled with the fact that value style sectors have underperformed growth for a decade plus before the pandemic.
❖ A common thesis is that this pattern can be attributed to interest rates from the GFC and beyond, considering growth style companies rely on further-looking earnings, which buoyed by lower interest rates on the 10 year, present a scenario that is commonly attractive to investors. When interest rates rise, value style companies can be more poised to outperform, seeing as their earnings are more related to the present, and they do not need to grow into their valuations to the same degree that growth style companies do from a P/E perspective. Of course, past performance is no guarantee of future results, and a diversified portfolio is the most prudent factor in long term investing, but a mean reversion following such dramatic events in the last year can be observed. Value has outperformed growth since November, and in the same timeframe the 10 year has increased by nearly 1 percent. [4] Overall, parallels that can be drawn between the waning of the last pandemic and now, and time will tell whether the same effects of American consumer will be observed this time around, or whether we will see the next iteration of this century’s “Roaring Twenties”.
Disclosures & Sources:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often neutered for investments in emerging markets. Asset allocation does not ensure a profit or protect against a loss.
Investing in mutual funds involves risk, including possible loss of principal. Find value will fluctuate with market conditions and it may not achieve its investment objective.
Stock investing includes risks, including fluctuating prices and loss of principal.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect principal.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Financial Consultants at Vintage Wealth Advisors are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice and financial planning offered through Financial Advocates Investment Management, DBA Vintage Wealth Advisors, a registered investment advisor. Financial Advocates Investment Management, Vintage Wealth Advisors, and LPL Financial are separate entities.
