Navigating the Consumer

Historically the consumer represents about 2/3rds of the nation’s gross domestic product. So, one would think that understanding the state of the consumer would help provide guidance for navigating the equity markets?

If we start with spending, the consumer appears solid. Simplest way to look at this would be to view the stock performance of Visa or Mastercard.

Over the preceding 52 weeks, both names are performing well, up 26% and 16% respectively.

The Economic data on Income and Spending, reported today, also show that the consumer is on solid footing:

But, “Real” personal spending, or in other words “inflation adjusted”, shows some signs of weakness, with a negative previous print that was also revised lower, and a miss of the estimate today.

Both metrics above are considered “hard” data, it’s the “soft” data or survey-based metrics that have many wondering about the direction of the consumer.

Earlier in the week the Conference Board’s Consumer Confidence Expectations metric was released, and it was the lowest reading in over 10 years.

The problem with the above chart is its relationship to the Forward multiple on the SPX.

As shown above, when the survey approaches the 65 level or lower the multiple generally trends toward the 17X level, nowhere close to the present Fwd. multiple of 21.5X.

The University of Michigan has plenty of different surveys, one was released today, which we will discuss below, but first we wanted to point out their survey on the probability of real income gains in the next 5 years.

If the consumer does not expect to have increased future income, then why would they keep spending at current levels, let alone increase their spending?

From U of Mich website:
https://data.sca.isr.umich.edu/charts.php 

Using the excel data available on the above link, we overlaid the above chart in Bloomberg. We added retail sales, in the middle panel, and the 4-week unemployment claims index, in the bottom panel.

Hard to believe sales don’t slow and that claims do not go higher?

As mentioned above, today the latest U of M Consumer Sentiment was released. It came in with one of the 5 lowest readings in the last 25 years. Like above, we have added the Fwd. SPX P/E multiple for perspective.

We think the above chart speaks for itself.


Why is it so hard to navigate?

We would like to offer an example we witnessed this week.

Used car pricing.

Bloomberg ran a story this past week on Wednesday, March 26^th, pointing out that Auto repossessions have recently surged to their highest level since 2009.

“In 2024, roughly 1.73 million vehicles were seized, according to data from Cox Automotive, up 16% from the year prior and 43% compared with 2022. The last time repos hit this level the US economy was reeling from the financial crisis.

The figures are another indication that consumers are struggling to keep up with their monthly bills, thanks to both elevated interest rates and the lingering effects of higher car prices.”

One economist interpreted this as meaning used car prices will be declining soon. Seems logical to us.

Fast forward to later that day after the close, Pres Trump announces part of his tariff plan, yes for the time being, and then the following day the auto companies all trade lower. Expected we would say.

What was not expected, at least as demonstrated by the stock reaction, was that companies with used car exposure would trade straight up. After all, we have reason to believe used car pricing is headed lower?

Two names up 20+% in 2 days, safe to say the market was caught off guard by the magnitude of the moves.

Our point is that it is becoming incredibly difficult to navigate these markets. What one can do is try to boil things down to a few simple factors or factor, and that brings us back to the consumer, who is after all the driving force behind 2/3^rds of the economy.

As discussed at the top, according to the Credit card companies and the hard data, the consumer is on solid footing. But many discretionary names, or more accurately their stock prices, are telling a different story.

Today, LULU was the latest casualty, but there are plenty of other examples away from the 4 names shown below, including but not limited to the cruise names, airlines, and hotel space.

Why point out the discretionary names specifically?

The final 2 charts of this discussion help tie up the point.

Utilizing data from Moody’s Analytics, Americans earning > $250,000 a year account for approximately 1/2 of all consumer spending in Q3 2024, up from 1/3 in 1990s. In other words, 10% of the population control 33% of the GDP, 66% of GDP is the consumer.

This same demographic is also overly represented in the equity market.

What happens to spending if the equity market takes a further hit?

Just to add one further twist, keeping with the confusion theme, this market is setting up for a rally due to counterintuitive reasons.

“Expectation for higher vs lower stock prices lowest since 2010.  When people anticipate something they tend to prepare by acting accordingly, hence this is a contrarian indicator supported by our policy uncertainty and other sentiment surveys.”

it’s all very confusing.


Commodities

The daily stuff appears to be headed in the right direction.

The ”dig it out of the ground” stuff is headed the other way.
Copper in top panel, Gold in bottom. Both all time highs.

Levered loans vs High Yield

One quick chart that may concern some. Are levered loans leading high yield spreads? Is this a precursor to spreads widening?

Finally, we could not help ourselves….

Have a great weekend!

Best,

Meraki Trading Team

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About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

Consumer Expectations:

University of Michigan metrics were released today, and probably to nobody’s surprise they were weaker than estimates. At least 6 different consumer facing companies have mentioned they were seeing reduced consumer confidence recently, RH, DKS, DAL, UAL, KSS, and WMT.

“According to The Wall Street Journal, “Citi’s analysis of its U.S. credit-card data shows that spending has fallen across most retail categories. In the retail quarter to date, spending plunged 12% and 22% on apparel and athletic footwear, respectively, compared with a year earlier. But even less-discretionary categories such as food retail, aftermarket auto parts and pet retail are seeing moderate declines.”

Caution Clouds Walmart and Amazon Outlook as Shoppers Tighten Budgets

The printed numbers showed sentiment is worse than previously thought and inflation expectations are also trending negatively. Not exactly the combination a healthy economy would like to see.

Taking a deeper look at the Expectations Index shows it is challenging the lows from the depths of the pandemic in mid-2022.

We add Adjusted Retail Sales Monthly % change as well to offer perspective of the impact to retail sales when this indicator moves meaningfully lower. As the chart depicts above, there appears to be a negative impact to sales post the significant pullbacks in the Michigan Sentiment, and it’s possible we have yet to experience that post this recent pullback.

Dow Theory:

For all those unfamiliar with the Dow Theory we present the definition as presented by Google.

“The Dow Theory is a technical analysis concept that suggests stock markets move in trends, with primary, secondary, and minor fluctuations, and that these trends can be identified by analyzing the movement of major market averages like the Dow Jones Industrial Average and the Dow Jones Transportation Average, where both indices must confirm each other to signal a trend change; essentially, it states that a market trend is only valid if both averages move in the same direction.”

Why present this? Well it looks to us like the Transportation Index, TRAN Index, is breaking down. Despite today’s bounce, it is approaching the “Bear market threshold” of being down 20% from recent highs.

Looking at the same index relative to the equal weighted SPX, the SPW Index, it appears as if it is approaching a dangerous level. We choose the equal weighted index to try and minimize the magnificent 7 impact.

Back to the strict definition of the theory from above, the below chart shows that the DJ Industrial Index is following suit of the TRAN index.

Now adding the SPX Index, which is the more common barometer for the broader market, and it is also moving right in line with the Industrial Index.

Now, there are some that could make the argument that the Transport Index does not carry the impact significance it has carried in past economic cycles. Not for us to opine on, but we would like to point something out that is similar to what we mentioned last week about corporate spreads starting to widen out a bit, but this time the focus is on CDS. We put together the largest members of each index that have similar Credit Default Swaps openly trading. Is it possible bond holders of some of the most prominent companies in the country are becoming cautious on their outlooks?

TRAN Index

INDU Index

The 4^th column from the left in both matrixes show the % that the CDS is trading away from its 52-week high. The farthest left column offers the % from its all-time high. 8 of the 10 names in the TRAN Index CDS are trading within 10% of their 52-week highs, while 2 of the 10 are within 10% of their all time CDS highs.

With respect to the Dow Jones Industrial Index, 6 of the 10 names are trading within 10% of their 52-week highs, while only 1 name is within 10% of its all-time high.

So, what is the takeaway here, like the corporate spread point last week, the absolute levels are not threatening in the grand scheme of things, but the delta on the moves in CDS relative to their 52-week performance is notable, especially within the Transportation Index. From a very simplistic point of view, it is hard to see the economy improving if the companies that move goods are not fairing too well.

Revisiting Employment metrics:

Bank of America published a chart this week we thought looked familiar.

It was published with this commentary:

“One year ago, 85% of US job market growth was in government and sectors dependent on government spending like health and education.”

“The global handoff from big government to the free market may prove slippery, but it seems necessary given large deficits and bloated debt burdens. Economic growth has been enabled by unsustainable government upport and protectionist policies.

It may take time for private sector job growth to accelerate, for government workers to resettle, for broad-based corporate profits to rise, and for global trade to find a new equilibrium. In our view, the likely productivity gains from a market-based economic reboot are greater than risks; and the risks from the unsustainable status quo of debt-financed, tepid, and narrow economic growth are severe.”

– Jared Woodard, BofA Global Research, March 12, 2025

We agree, and for those that might remember, we offered some charts a few weeks back suggesting the same point.

The above shows the % of Government job contribution as well as Healthcare and Education to the overall Non-Farm Payroll number. The simple point is if Government jobs will be trending lower as well as Health Care and Education, as a casualty of reduced Government spending, then the NFP may be in for some rough sailing going forward.

Next Week:

Next week eleven central banks have rate calls: FOMC, BoE, BoJ, Brazil, Swiss SNB, Sweden Riskbank, Iceland, Indonesia, South Africa, Taiwan and Chile

Other key events next week are:

• Nvidia GTC; Jensen keynote Tues 3/18 at 1pm EST
• China State Council briefing Monday re economic plans
• US macro: ret sales, Empire Mfg, inds prodn, Philly Fed
• US housing data: housing starts, existing homes, NAHB Housing
• UST auction: $13b 20y and $18b 10y TIPS
• EU data: Germany ZEW, Eurozone CPI, UK unemployment
• China Macro: prop px, ret sales, inds prodn, prime rates
• Japan: Aside from BoJ we have CPI, Inds Prodn
• Oppie 35th Annual HCare conference
• Piper 25th Energy Conference
• RBC Opthalmology Conference
• BofA Global Industrials Conference
• Baidu to launch next gen of AI model, Ernie 4.5
• Busiest week of EPS for China (sent separate email)
• US EPS: ACN, NKE, MU, FDX, GIS, LEN, CCL, LULU focus

Have a great weekend!

Best,

Meraki Trading Team

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About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

10yr TSY

Today, Friday February 28^th, there was a fair amount of Economic news released, including the Federal reserve’s preferred inflation metric, PCE. There were some surprises both good and bad:  personal Income better, spending disappointing both in real and inflation adjusted terms. The PCE metrics were all basically in line with expectations.

The reason we mention it is because the true measuring stick is usually the response of the 10yr TSY. At the time of this writing, the 10yr is basically flat on a yield basis. It just so happens to be hovering right around 4.25% yield. Funny enough, we saw a chart earlier in the week that suggested the 4.25% level is rather attractive.

China continued

We would like to revisit a chart from last week that we are still trying to fully understand.

This one:

M1 Money supply for China. Quite the chart!

We noticed a few headlines this week regarding Chinese economic policy on Bloomberg as well.

Monday: China’s local governments are set to issue an unprecedented $233 billion of bonds in the first two months of the year, exacerbating a cash squeeze in the financial system.

Tuesday: China is increasing scrutiny of outbound investments by domestic companies as well as their use of proceeds from Hong Kong share sales, people familiar said.

Wednesday: China plans to inject at least $55 billion into three of its biggest banks, people familiar said. The plan may be completed as soon as June and follows through on a broad stimulus package unveiled in 2024.

The question becomes why is China going through these motions now? The top 6 banks have capital levels that far exceed national capital requirements. Is there something the Chinese Officials see that nobody else does?

What metrics could we look to for evidence that mark to market could be an issue? First thought is home prices.

The Home Price Index suggests prices have been in a negative trajectory since early 2017.

Looking at all property developer and home building names in HSI and CSI indices, we see that despite both broad indexes either being at 52-week highs or within 7% of 52-week highs, the property developer and home builder names in the two indices are on average 22% off their 52-week high.  They are underperforming the broader market. 

Maybe the market senses something as well considering the differential in performance?

China increases the M1, top chart, adding liquidity to the economy. Announces Monday they will sell $233B in bonds to soak some of that liquidity back up, but then also announce they will “increase scrutiny of outbound investments by domestic companies” to keep everything onshore.  More importantly, why now?

As the reader you can draw your own conclusion here on what this data means. 

Housing Affordability

Housing affordability is getting strained fast.  Annual U.S. household income needed to purchase a typical US home.

Jan. 2020 -> $51,646

Jan. 2021 -> $51,740

Jan. 2022 -> $62,669

Jan. 2023 -> $86,184

Jan. 2024 -> $92,006

Jan. 2025 -> $92,538 

5-year shift +79%!   

The result of the above.

Existing home sales making 20+ year lows.

Brown Shoots

Are we starting to see a more consistent flow of data points that suggest the economy is slowing? It sure seemed that way this past week.

Let’s start with Consumer Confidence:

Consumer Confidence Expectations

Initial Jobless Claims

Retail Sentiment

The AAII survey of the US retail investor has just collapsed to -41.2, the 8th lowest reading since the survey started in 1987.

Finally, US Average Weekly Hours Worked could be suggesting pain ahead as well.

Recently, each time the US Average Weekly Hours has dipped below 34.2 hours, a recession has occurred. Granted the 2nd time we were in the midst of a pandemic. GDP is stealthily moving lower, along with the Average Weekly Hours Index already below 34.2, it’s a cross-section of economic data to keep an eye on.

Most recent GDP Now estimate from Atlanta Fed.

Yup, we hate to leave you with that, but that green line is now in negative territory!

Have a great long weekend!

Best,

Meraki Trading Team

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About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

Retail Sales

Today, Valentines Day, Retail Sales were released by the US Census Bureau and they disappointed estimates.

The one that we would like to point out is the Control Group. 1.1% miss to expectations is a big miss, and more importantly it goes into the calculations of other macro indices. We are no experts on the exact math, but shortly after that number was reported the Atlanta Fed updated their GDP Now estimate. Now, we are only ½ way through Q1, but they revised down their Q1 GDP estimate from +2.9% to +2.3% which we thought worthy of mention.

Consumer Credit

Juxtapose the January Retail Sales numbers discussed above with Consumer Credit numbers from December.

Last week Consumer Credit MoM (Non-Mortgage) was released.

Obviously, seasonality plays a role in this number, the holidays, and all, but at almost 9X the December average, the metric is notable.

Another reason it was noticeable:

That was actually the largest addition ever.

Reminded us of a chart we presented recently showing large private debt as well as the present interest rate level.

Now, let’s add the cost of that debt at the present interest rate level to see what the gross $ amount looks like. Simple math for perspective, $1.38 trillion at 21.47% interest rate equals $296 Billion in interest costs.

That’s an 80% increase in interest costs between pre- and post-pandemic, born entirely by the individual consumer.

Retail Sales increased 39% from pre Covid until recently, the amount of interest owed, not including principle, has increased by 80%.  That’s more than double that sales metric. At what point will this begin to impact the consumer’s purchasing power? 

Housing Prices

We have pointed out the impact of housing’s prices on inflation metrics before, but we think there is one chart worth updating.

Not since the GFC has this index seen these levels.

On a seasonality basis this metric has not been this bad since 2009.

Indices

A couple of random notes caught our eye this week. We mention this, because in a nonlinear way, we believe they are related.

Last weekend, Bloomberg ran an article discussing the economics of different Hedge Fund business models.

The following chart was included:

In this day and age of increased transparency, it makes us wonder if public endowments and pension funds will become increasingly cost sensitive to their investment choices?

Then, we came across the Bill Ackman letter that included a fair amount of informative charts.  This one in particular caught our eye.

Passive funds now represent more than half of all mutual fund and ETF assets, making inclusion in the indices they track increasingly important.

So, if we consider the concept of price consciousness from the first point above, and the trend direction of index fund flows from the 2^nd point above, the relevance of popular benchmarks/Indexes will become ever more important.  It could prove to be a virtuous or vicious cycle, depending on adds and deletes. 
It makes us wonder if keeping an eye on the particular companies, whether public or private, that oversee the construction of popular indexes might not be a wise move?

Small Business Outlook

The NFIB recently released a bunch of their Indices. We like to keep an eye on a few. One stood out this week: The Small Business Outlook for General Business Conditions. It has had quite a run.

For perspective we wanted to see the last time the outlook was this good. It may come as no surprise that it was back in 2016.

Notice the similar vertical incline?

Funny enough they have something in common.

We add the SPX Fwd. estimates for this reason. In the 3 years before the pandemic struck, or prior to the AI phenomena, the estimates moved up by 52%. Maybe this is just coincidence, or maybe not, but it’s hard not to notice the improved sentiment out there after the first 20 days of President’s second term.

Have a great long weekend!

Best,

Meraki Trading Team

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About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development

CPI & 10yr.

Occasionally, it’s nice to look back at some older charts or metrics that used to be in greater focus, just to review. One that caught our eye recently is the correlation between US CPI and both the 10yr TSY as well as the 2yr TSY.

The correlation is rather strong:

We thought the .851 is notable, so it led us to take a deeper dive into the CPI. We all know Inflation has been top of mind since the Fed began its raising cycle and even more deeply followed once that course was reversed.

Core Services is the greatest single sector contributor to the CPI, and of that 61%, 34%-more than ½-is directly related to shelter.

Below we have the 2 components that add up to 34% of the CPI. As the chart depicts below, both metrics have yet to return to pre covid levels.

Why focus on these 2 metrics, other than their weightings in the CPI?

Well, Pending Home Sales were reported Thursday, January 30^th, and the YoY number came in well below expectations:

As seen above, a big miss on the Pending Home Sales YoY, 4.2% Est vs -2.9% actual, is what caught our eye.

So, Sales are certainly falling off, but what about supply? Could it be supply is spooking would be buyers?

Does not look like it from the below chart.

Hard to miss the media not mentioning that Housing supply is lacking. If we look a little deeper though, through a seasonality lens, it appears we are headed into the time of the year where inventory builds.

Below is a Heat Map showing Inventory by month, same metric as the above chart.

As seen from the 5-year averages above, Inventory seasonally grows January through July.

One part of the home sales equation we have yet to mention is the affordability part. Home prices over the last 5 years have doubled wage growth.

Affordability has become a serious headwind, most likely being a large contributor to the Pending home sales miss on Thursday.

or looked at in a different way:

Both charts are interactive and from the following link in case anyone would like to take a deeper dive:

https://www.atlantafed.org/research/data-and-tools/home-ownership-affordability-monitor 

It is hard to believe in a scenario where the 2 constituents of the CPI mentioned above could move higher and continue to help elevate the CPI Index itself. Between the headwinds of affordability and seasonality, pricing could see its momentum change.

The .85 correlation would lead one to believe the 10yr TSY could begin to feel the impact of those headwinds.

Employment

Is the US job market weakening under the surface? The average duration of unemployment in the US jumped to 24 weeks in December, the highest in nearly 3 years. Over the last 2 years, the average duration of unemployment has jumped by 5 weeks. The time it takes Americans to find a new job is now higher than in any other period before the 2008 Financial Crisis. This data coincides with new job postings on Indeed falling over the last 3 years to near their lowest since the 2020 pandemic.

As seen above, other than during Covid, every time this metric begins to move up, a recession seems to appear.
The Indeed job postings below.

Have a great weekend!

Best,

Meraki Trading Team

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About Meraki Global Advisors

Meraki Global Advisors is a leading outsourced trading firm that eliminates investment managers’ implicit and explicit deadweight loss resulting from inefficient trading desk architectures. With locations in Park City, UT and Hong Kong, Meraki’s best-in-class traders provide conflict-free 24×6 global trading in every asset class, region, and country to hedge funds and asset managers of all sizes. Meraki Global Advisors LLC is a FINRA member and SEC Registered and Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.

For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development