The Consumer Remains Worried

I haven’t been able to publish since last week, but the last piece proved prescient.  In the wake of a weak Retail Sales report, we entitled it “What’s Eating at the Consumer?”  Considering Walmart’s (WMT) weak guidance yesterday and another sour report from the University of Michigan this morning, I’m afraid that events are confirming our recent concerns.  Yet despite the modest selling over the past two days, stocks aren’t fully reflecting the gloomy mood.  Here’s why…

To my mind, the wealth effect is the key difference.  Frankly, investors are doing rather well.  Those who simply put most of their 401K money in an S&P 500 (SPX) index fund are up about 50% in two years; many have done even better.  While many people might understandably be getting a bit more jittery about inflation or their job prospects, their faith in markets remains relatively unshaken. 

Furthermore, investors who have been on a winning streak might actually be putting more faith in their investments to offset the potential hits to their spending power.  At an investment conference this week, I had more than a few conversations with individuals who expressed that sort of opinion to me.  They are feeling some of the malaise that is beginning to bubble under the real economy, but they remain optimistic that their investments will insulate them.

Whether that belief is correct or not remains to be seen.  But many WMT shoppers don’t have the type of investments that can support that type of thinking.  Most Americans live paycheck to paycheck.  Their financial well-being is directly related to their employment and spending, not their portfolios.  Thus, if the consumers are saying they are nervous in surveys and then demonstrating it via retail sales, we all need to be listening – even if the broad market isn’t. 

Quite frankly, those sentiments can diverge for a while.  One can remain invested in the long-term potential of AI while tightening one’s belt at the store.  The stock market is not the economy, and vice versa.  But markets do eventually need to recognize broader economic trends – they’re inescapable in the long-run.  We addressed this last week, writing:

Remember, the consumer is about 2/3 of the economy, and if something is bugging them, that will be felt in GDP.  We recently wrote about how we might be underappreciating the role that fiscal policy played in the recent economic and market advance, noting that reversing the “G” in the equation GDP=C+I+G+NX could negatively impact GDP.  Now it looks as though the much bigger “C” might be a problem as well.  As much as traders crave lower rates, a strong economy is ultimately better for stocks than a weak economy that induces lower rates.  (Of course, the 2024 scenario of a solid economy AND rate cuts is ideal.)

This is where we need to remember the idea of the multiplier.  If any of the elements in the equation above increase, it tends to have a positive impact on the other items in the equation.  Reducing government spending could certainly have long-term benefits for interest rates and economic health, but in the short-term, the decline in “G” affects “C”.  Those who are laid off from government jobs will need to shrink their spending, affecting “C”.  And if others in their communities begin to feel the impact of that lower spending or become concerned about their own jobs, that further depresses “C” and even “I”. 

Of course one might then think, “OK, won’t this lead to rate cuts?”  It might, and that is why I am watching 2-year yields very closely.  As much as markets love rate cuts, the Fed isn’t always as quick to oblige with them as they need to be.  If the FOMC remains on the sidelines for too long, awaiting policy clarity, as GDP falters, that is not a helpful scenario for investors – especially if that lack of policy clarity involves the potential for tariffs.  But that is not an immediate concern.  Perhaps, though, investors need to listen a bit more to the nervous noise from the consumers.