To Infinity and Beyond - Global market update

By the time you are reading this on Monday morning, some of the guess work about what the future holds for the share price of SpaceX will be answered – will it be a rocket ship heading to the stars, or will it still be sitting on the launchpad or, worse still, flamed out? With retail investors reportedly having placed orders to buy $100bn worth of the initial public offering ahead of time, it seemed that the animal spirits of the “Elon Massive” were primed and ready for lift off. Either way, what will be, will be, and maybe investors can move on to talking about the topics that are more important to the economy and the market.

On a recent visit stateside, I met up with the managements of several listed companies in the consumer and technology space, and while today’s Zeitgeist would lead me to discuss the thoughts and machinations of the ‘tech bros’, what is potentially more insightful is the feedback from their decidedly more downtrodden brethren, who ply their trade in the consumer sector.

To set the stage, it is probably worth remembering that as per the recent economic stats for the US, companies are now taking a higher share of economic value (as determined by gross domestic product, or GDP) than at any point in the past. Economy-wide corporate profits relative to GDP can be seen as some sort of profit-margin metric for the economy and, notwithstanding a slight dip in Q1, it is super-high and has been for several years now. The corollary of this is that labour’s percentage has been declining and is at decadal lows.

Higher profits and margins are good for share prices; therefore, anyone in a position to actively participate in this phenomenon through equity ownership has likely done pretty well. In aggregate, though, things aren’t looking quite so rosy for consumers. Gauges of consumer sentiment may differ, and while the Conference Board confidence measure isn’t as downbeat as the University of Michigan metric, it doesn’t exactly suggest that households are singing hosannas either.

Personal income and spending data for April showed a few troubling aspects. Nominal income last month was flat, with disposable income actually falling slightly. In real terms, the disposable income drop was more substantial. To date, this hasn’t been catastrophic for household spending, largely because the starting point in a post-COVID era was a large pool of excess savings. Over the years, though, an increasing cohort of the public has likely drawn down their savings, and the personal savings rate in April was a paltry 2.6% – the lowest since mid-2022.

But it’s not just about the money you have in your pocket, it is also about how much you can buy with it. Last week, Consumer Price Inflation (CPI) data posted its highest year-on-year reading in more than three years, and while economists might be satisfied that the number was in line with their expectations, I suspect that much of the public is not. Although there was some respite in the core inflation measure, that arguably doesn’t change very much at all about the monetary policy prognosis, which points to a 0.25% increase in interest rates before year-end.

Inflation remains above target; the price level is way above that implied by the target; and real income remains demonstrably below trend. Meanwhile, the news from the Middle East provided an unwelcome backdrop over much of last week, even if the price of crude oil hasn’t really done a whole lot.

And what of the companies trying to operate in this environment and service those consumers? Well, to borrow a phrase from George Orwell’s Animal Farm, “all animals are equal, but some animals are more equal than others”. As a CEO or CFO of these businesses, your outlook on life depends on what segments of society you are dealing with. Overall, the so-called, ‘K-shaped’ economy was the key theme for most of thecompanies. For those with a larger exposure to the lower two income quartiles, things are tough with a consumer that is focusing on the prices of essentials and eliminating as much ‘discretionary’ spend as possible. The payment-sensitive consumer largely remains sidelined amid geopolitical noise, increased product costs, higher rates and general macro uncertainty.

Moving into the middle- and upper-income categories, the story improves a little. This consumer is more resilient but increasingly value-focused – it’s not about the lowest price, but the best value for money. Here commentary was mostly focused on initiatives to drive customer engagement and traffic. Value is winning, but at the same time brands and retailers that deliver compelling fashion or menu innovation are finding receptive consumers willing to part with their cash!

The best insight into this cohort probably came from the hotel operators, who saw their world more as a ‘C’ rather than a ‘K’. Revenue trends are improving in aggregate, but luxury growth rates are starting to roll over (how many holidays a year can one person take?) and middle income beginning to pick up – don’t care but need a holiday to get me through this year.

Whether the gains (if any!) from the retail trading frenzy of SpaceX make their way into the spending plans of those that make them, only time will tell. But it won’t lift everyone’s boat, and the gap between Wall Street and Main Street is starting to feel like the distance from here to the moon!!