Wednesday, August 3, 2022

Morning Note: Cautious Optimism Re The Consumer

At first blush, this is a shocking headline
"Credit card balances jump 13%, highest leap in over 20 years, as inflation outpaces wage growth"
Upon further inspection, no need to panic just yet:
"Even so, balances remain slightly below their pre-pandemic levels, after sharp declines in the first year of the pandemic."
As you may have noticed of late, our latest assessment of current conditions leans in the direction of a relatively mild recession. Largely, but not entirely, based on the general health of the US consumer. 

Recall, from our July 18 note:
"...while we know that the reported mountain of US consumer savings out there is concentrated among the wealthier among us (they say 70% of it) -- according to yesterday's Wall Street Journal the remaining 30% is quite diffuse:
"The hit from the pandemic proved short-lived for many. Two years since it began, household finances are remarkably strong.

At the end of March, households had $18.5 trillion socked away in deposit, savings and money-market accounts, more than $5 trillion above what they had heading into the pandemic, according to Federal Reserve data.

Cash reserves rose across income groups. JPMorgan, tracking 7.5 million of its own accounts, found that checking-account balances averaged nearly $1,400 among its lowest-income customers in the first quarter, up from under $900 before the pandemic. Among its highest-income accounts, balances rose to almost $7,000 from less than $5,500." 

Here’s BCA Research on their US investment strategists’ view on the current state of the US consumer:

"They remain positive on the outlook for consumption thanks to the significant savings buffer held by US consumers. Consumers also show no signs of credit distress and the team views the declining savings rate favorably – as evidence that households are drawing down these savings to continue spending."

While I am aware of anecdotal evidence that suggests that there are pockets of simmering issues around unsecured consumer debt, the reported data, so far, warrants cautious optimism, particularly as inflation comes off the boil.

"Compared to output, income and net worth, aggregate consumer indebtedness is at the low end of its twenty-first century range." --BCA

My point for now being, while indeed credit card usage is ramping up -- and should be closely monitored going forward -- at this juncture it does not paint a desperate picture for a consumer whose balance sheet remains historically-healthy...  

Lastly, speaking of consumer-related data, all eyes will be on Friday's July jobs report. The latest on job openings, reported yesterday, shows a still historically-high number, however, June (coming in below expectations) marks the 4th consecutive decline. The quits rate (second panel below) -- viewed as a positive indicator when high (folks don't quit their jobs when they fear recession) -- while declining as well, also remains historically-elevated:

Asian equities rose overnight, with 12 of the 16 markets we track closing higher.

Europe's largely in the green so far this morning as well, with 17 of the 19 bourses we follow trading up as I type.

US stocks are green to start the session: Dow up 225 points (0.78%), SP500 up 0.78%, SP500 Equal Weight up 0.58%, Nasdaq 100 up 1.23%, Nasdaq Comp up 1.20%, Russell 2000 up 0.84%.

The VIX sits at 22.71, up 5.10%.

Oil futures are up 0.11%, gold's up 0.33%, silver's up 0.11, copper futures are down 0.42% and the ag complex (DBA) is up 1.27%.

The 10-year treasury is down (yield up) and the dollar is up 0.11%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 25 -- led by Disney, uranium miners, ag futures, Sweden equities and communications stocks -- are in the green so far this morning. The losers are being led lower by AMD, defense stocks, Albemarle, utilities and oil services stocks.

"We know nothing – that is the first point. Therefore we should be very modest – that is the second. That we should not claim to know when we do not know – that is the third. This is more or less the approach I should like to popularize. It does not have good prospects."

--Popper, Karl. All Life is Problem Solving 

Have a great day!