Stocks Feel Sting as Consumer Spending Slows

Consumer spending makes up approximately 70% of GDP (Gross Domestic Product). Consumer spending comprises many different goods and services across all sectors. Consumption expenditures can be durable goods, like cars and houses, or non-durable goods, like food and fuel. Services will include haircuts, education, banking, healthcare, and everything in between.

Three other areas make up the remaining 30% of GDP. The other components of GDP are business investment, government spending, and net exports of goods and services. These four components will show the overall health of a country’s economy.

Discretionary spending is an essential indicator of how people feel about the economy. Discretionary spending is where people spend money after paying essential bills. This type of spending would include travel, restaurants, gym memberships, streaming services, manicures, lawn care, and other non-essential services. The trends are showing inflation has significantly decreased consumer discretionary spending, specifically in services. Airfare searches are down about 13%, and restaurants have fallen 11% from the pre-Covid economy in June 2019. Also, the average restaurant tip has decreased from 20% to 10% this year.

Deloitte says 61% of all people are concerned about their savings right now, which is almost double from March 2021 and 56% of people are wary about making a large purchase. Despite nominal wage growth of 6.6%, on average, the weekly take-home pay is 5.6% less than it was at the end of 2020. These trends are slowing discretionary spending and decreasing savings rates.

People tend to save more when there is more disposable and discretionary income. As the above chart shows, people are saving about half as much as one year ago.

The chart shows a relatively strong correlation between savings and consumer confidence. People feel confident when they have more savings and less confidence when they have less financial security. Consumer confidence is down for the third month in a row. Confidence is subjective but can predict economic behavior relatively accurately. The less confidence the consumer has, the more likely they will change their spending habits and reduce discretionary spending. A recent Forbes survey found that 85% of respondents have modified their spending habits for essential items. Some people are buying less. Some people buy different but cheaper brands, and some stop altogether. As people change spending habits, the speed of money can drastically slow down while accelerating other economic challenges. These small movements of individuals can start small but can have tidal wave effects on the economy.

Here is an example.

Lisa is a 56-year-old waitress. She depends on her tips. As people tighten their spending, they visit the restaurant less frequently. Her manager cuts her hours because of the reduced customer traffic. When people do come into the restaurant, they are generally tipping less. She is working fewer hours and taking home less money. However, inflation is making her groceries and gas a significant part of her income. She isn’t saving any money and doesn’t have enough to maintain her standard of living. She decides she can no longer afford her weekly manicure and dry cleaning of her work uniform.

Less money is flowing to the manicurist and dry cleaners. They also start cutting their employees' hours, leading employees to make similar financial choices and sacrifices as Lisa affecting even more businesses. The ripples move quickly through society, and business owners have hard choices. Inventory is becoming more expensive, and cash flow is becoming less. There is less available capital for wages, but without paying employees a living wage, they will quickly look for other options. If there is no inventory, there is no business. If there is no one to sell the inventory, there is no business. The cycle becomes a downward spiral and forces people to rely more heavily on credit to keep their businesses going. However, interest rates are high, so the cost of capital is more than expected, and profits are less than hoped. More people need to cut their spending monthly and make choices like Lisa.

As the loss of purchasing power flows through society, businesses will predictably make less money each month than the previous month. This cycle spirals through society quickly. This month it is the waitress. Next month it is the truck driver. The month after, it is the mid-level manufacturer. It will keep climbing up the economic food chain. Give the cycle enough time, and the economy goes into recession or depression.

If it were only Lisa, the overall impact would be minimal. It becomes dangerous when large percentages of the population are in different stages of losing purchasing power simultaneously. Example over.

This example is how it happens in the real world. Many people are putting their purchases on credit cards. When savings decrease, people change their spending habits and become more dependent on credit. Another Forbes survey found that 40% of credit card holders are more dependent on credit cards than one year ago. The data ending in May shows that consumer credit card debt has gone up 5.9% ($156.63 Billion) since January.  

The stock market had the worst annual start in 50 years, and U.S. Treasuries had the first annual start since 1788. Paper is not the place to be right now. Record high inflation, decreased consumer spending, heightened credit card use, and diminished savings are forecasting low stock market earnings. In all likelihood, the stock market hasn't hit bottom yet and isn't very close to the bottom yet.

Many financial advisors have consistently recommended a 60/40 portfolio split between stocks and bonds. In normal and healthy markets, this may be sound advice. However, if people will continue adjusting their purchasing strategies and "tightening their belts," the most predictable outcome is that the stock market will continue going down. Does it make sense to have 60% of one's net worth where the most likely direction is farther down?  

Bond prices go down when interest rates go up. Rates are rising. When inflation increases, the historical performance of the S&P500 goes down. Inflation is still climbing. Concerning cryptocurrencies, when the wind blows, or a cat sneezes, the price can fluctuate 10% up or down. Several cats have allergies this year because Bitcoin is down -56.09% in 2022. (Note: There is no data to support cat allergies affecting cryptocurrencies, but despite the hype, there is also no data to support any price for a limited supply of nothing. Cat allergies make as much sense as anything else to determine or explain crypto prices and volatility)

The stock, bond, and cryptocurrency markets have incredible risks right now. Rising interest rates could facilitate a massive housing correction. Just read history to see how bad this could get. The best strategy is to take actions to minimize risk and diversify your portfolio.

Gold is not a miracle cure to everything wrong in the economy and won’t make you rich overnight. However, gold has held its value for thousands of years. Metals are considered a hedge against inflation. Gold and other precious metals aren’t an offensive investment strategy. Instead, metals are defense. They help people not lose what they have earned. There are growth opportunities, but gold is primarily about protection.

Growth does happen, and sometimes it is substantial. The gains can be great, but they are the frosting, not the cake. The protection is the cake. The best way to think about gold is that it is a better value store than cash. Many people are transferring some or all their retirement accounts into precious metals and making liquid purchases to protect themselves.

Honest financial advisors will tell you to keep between 10-20% of your portfolio in tangible assets like precious metals. However, there does seem to be a trend over the last year or so of higher net worth individuals keeping a more significant percentage in metals. The number that makes sense to you may be higher or lower, but our caring professionals will educate you and answer all your questions.

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