The Consummate Consumer... - Global market update

Back in 1907, Mark Twain published his “Chapters from My Autobiography” and in it he discussed the persuasive power of data or numbers to bolster weak arguments by making reference to a quote from Benjamin Disraeli – “there are three types of lies: lies, damned lies, and statistics”. While equity markets remain fixated with all things AI-related as if it is the be all and end all for the US economy, other financial markets seem more focused on the fate of the actual largest part of the economy – the consumer. 

As last week began, consumer price inflation and retail sales loomed large on the horizon as investors sought evidence of the latest energy-related squeeze on consumer finances. The previous weekend brought some stories on the dangers posed by the US consumer, namely that households start to retrench and quit spending. It’s not hard to see where these sorts of concerns come from: consumer confidence is at rock-bottom levels; energy prices remain elevated; and households have been drawing down savings. 

So far, the data have shown that consumer spending has been resilient; the big reason for this is that households continue to draw down savings. The recent revisions to personal consumption expenditure data didn’t put any actual money in the public’s pockets but did suggest there was a little more ‘moola’ in their wallets than previously believed. This leaves a lot more room for spending than previously thought and is arguably one of the big reasons why consumption has held up as well as it has.

While at an index level the stock market may seem to be ignoring the woes of the consumer, what can’t be ignored is that as the S&P 500 hovers near its ding-dong high despite the still-elevated level of interest rates, the wealth effect that follows from a rising stock market also probably explains some of the resilience in household spending. The lowest income cohort has thus far done much better out of the AI bubble than it did in the dot-com years.

Still, the low level of confidence suggests energy prices are leaving a mark and it’s not all pony rides and lemonade for the public at large. Frankly, it’s not that way for the stock market either. It’s no secret that the rally has been pretty narrow, even if that doesn’t really say anything about what happens next.

The problem with much of the ‘official’ economic data is that it is backward looking and tends to be subject to revisions – and, in some cases, substantial revisions. Luckily, there is a more real time/real life source of information on the consumer in the form of commentary from the large banks when they report their quarterly numbers. And last week, that all kicked off.

On the topic of consumer health and resilience, Citi remarked that “whilst much has been made of the AI boom, the consumer is still driving much of the growth, the labour market is stable, and companies remain active”. Jamie Dimon at JP Morgan observed that “the consumer has been quite resilient in the face of a number of headwinds that under different circumstances you might have expected would present a challenge”. Wells Fargo’s observations were that “high income households continue to benefit from strong asset prices, substantial home equity and stable labour income. And while lower income households remain more sensitive to financing costs, inflation and higher living and fuel expenses, they appear to be stable”. 

All the major banks noted that “consumer credit remains strong with charge-off ratio down from both the second quarter and a year ago, and early-stage delinquencies at historically low levels”. Debit and credit card spend grew in the low-double-digits year-on-year with continued momentum across lending categories, including gas and travel, supported by consumer demand. The best soundbite to sum up the consumer came from Wells Fargo: “as long as the economy continues to grow and employment stays strong, the consumer is good. And we're just not seeing signs of that changing at this point, either from the sentiment across our commercial client base or just in the actual metrics that we're seeing on the consumer side”.

The economy, markets and policymakers are arguably confronting a set of challenges not seen since the early 1980s. And while the phrase ‘this time is different’ is one of the most dangerous in finance, in some ways the current backdrop really is unprecedented for the vast majority of investors. Back then, the economy needed to weather a couple of recessions before rates could sustainably fall. While it may not be that hard to craft a narrative that long bond yields have peaked, it’s a little more difficult to envisage how they can go substantially and sustainably lower without enduring a bit of the pain that the economy sustained in the early 1980s. Time will tell how this all plays out!