CAMS Weekly View from the Corner – Week ending 6/24/2022
June 27, 2022
How many times have we all seen it – “in case of emergency break glass” – offering a means to alert the nearby that we have a front-and-center problem that demands immediate attention. We have been offering through numerous angles over the previous year how the consumer in us will be evermore challenged as the price inflation storyline unfolds. Today, we share yet another angle. This past week we had full confirmation that the collective consumer in us is strained in light of attempting to navigate the general pricing backdrop throughout society. The University of Michigan has a long-standing Consumer Sentiment Survey that has been part of the analytical landscape for decades. It gives all who are interested a look into the general health of the consumer in us as their Survey is meant to register how we feel about the current economic conditions and also expected economic conditions. It also entails expected price inflation down the timeline as well as having an overall Sentiment Index. All the above parts within the Survey have been trending in the wrong direction starting over the previous twelve months but in recent months have picked up tremendous momentum. This past week we saw a new all-time low in the overall Sentiment Index.
Click For Larger View: https://schrts.co/gsYbzuPB
Above is the overall Consumer Sentiment reading from the University of Michigan’s Consumer Survey. We take the above chart back 45 years to the late 70’s in order to place our current experience into a broad historical context. Far right is our down trending arrow highlighting the rapid descent of collective consumer confidence via the Survey. The red horizontal line connects the previous episode when it was close to our current reading which was early 1980. Dating back to the early 80’s and then early 90’s we have three arrows highlighting notable recessionary episodes with a simultaneous consumer sentiment reading dropping from previously healthy levels. (The arrow with the question mark – hold that thought.) In addition, we have circled the post 90’s Dot Com bust as well as the Housing bust of 2008 with the follow-on Great Recession as it was labeled back then. As the history shows us none of the highlighted episodes were as bad as now per the surveyed consumer. (Do you think we will evade recession this time with the above in mind?) Is it The Consumer or is it The Wage Earner? On a personal note, say over the last twenty years, I’ve fallen into happenstance conversations where “….can’t keep up with these prices…” was offered whereby my consistent reply would be “…..is it the prices or the lack of wage growth….?” Similarly other impromptu conversations would lead into “…….my wages need to be higher….” which in return I’ve offered “…..is it wages or is it prices you are challenged with……” The point is wages and prices – laborer and consumer are interchangeable and when we speak of one (in a large collective societal sense) we often are unrecognizably speaking to the other. Just last week we shared an edition speaking to this issue in that wage growth rates are not even close to keeping up with price growth rates. With this, when the wage earner in us hands over the earned income to the consumer within us said consumer experiences a “break the glass” moment upon seeing prices in relation to their earnings. Simply put, the two placed together – the household – is swimming under water. This speaks to the above Survey and the historical data shared. The notable times above where the consumer survey resulted in extremely low readings coincides with times where price inflation growth rates were overwhelming wage growth rates. To be certain, this is not one-for-one meaning that every time we had a short burst of price inflation Consumer Sentiment did not immediately dive. Rather, when it becomes a seemingly entrenched societal storyline of wages falling far behind price inflation we usually can then expect some follow-on consumer strain via the aforementioned Survey and with this economic growth issues. (Keep in mind, consumer activity makes up nearly 70% of our economy.)
Click For Larger View: https://fred.stlouisfed.org/graph/?g=QY7J
Above is the same chart we shared in our previous edition. This time though we ran it all the way back to the early 50’s. The blue line represents wage growth rates while the red line depicts price inflation rates. In the early decades of the chart we can see the blue line is consistently well above the red line. With this, taking the Consumer Survey data back that far consumer experiences were consistently giving readings of 80’s and 90’s as compared to today’s reading of 50. (If interested click the link to see the Consumer Survey experience from the early 50’s through the latter 70’s: https://fred.stlouisfed.org/graph/?g=QY9t) Speaking to the question mark in our first chart we seen in 2011 Consumer’s surveyed displayed distress. Interestingly, there were no recessions nor other historically significant references to point to that could offer such a drop. Per our chart directly above, with our red rectangle box depicting what they were experiencing we see that price inflation was escalating while wage growth rates were actually declining. This was a strong enough experience in terms of time that collective consumers began to ring alarms via the Survey but then the price inflation quickly fell relieving the pressure. Consumer confidence rose upward shortly thereafter. Bringing it all Together Throughout various editions we have stated the obvious that we need to see price inflation come down notably. A 1% reduction for example is not going to win the day. Realizing consumers represent a tremendous amount of overall economic activity they are clearly ringing the alarm bells. With this, recession will be hard pressed to be avoided lest we see price inflation drop meaningfully. The concern is will price inflation dropping be occurring because consumer’s raised the proverbial white flag and as a result recession is occurring. We continue to watch with an extremely open mind while paying close attention to general household challenges such as those above. Uncertainty is certainly the operative word of the year. I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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