Consumer/ Commodities/ Levered loans vs High Yield
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 26th, 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 2/3rds 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
About Meraki Global Advisors
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