Re-thunk

 

Re-thunk.  Stocks sold off into yesterday’s close, snapping a five-day winning streak.  Stocks can’t go up every day and one can’t avoid the facts, no matter how hard one tries.

 

N O T E W O R T H Y

 

Did you check under the mattress?  I don’t know about you, but if I could sum up all of the financial lessons taught to me growing up in the 60’s and 70’s, there was one common theme: Save your money!  As I grew older and attended university I learned something that appeared to contradict that solid foundation of financial wisdom.  In my Econ 101 class I learned that savings is a leakage in the economy.  Wait… a leakage?  What does that mean? The US Economy is highly reliant on consumer spending.  You have heard me say that countless times.  Around 2/3 of GDP growth is attributed to consumer spending.  OK, so more spending is good, but how much is enough? If we would like to see constant economic growth, there can never be enough.  That means the economy favors consumers spending as much of their incomes as possible… or even more… credit.  So, you see, when consumers save their income rather than spend it, economic growth suffers.  The Bureau of Economic Analysis is good enough to track US Personal Savings as Percent of Disposable Income, also known as Household Savings.  They have been keeping records on savings since 1959 and if you look at the quarterly chart, it tells an interesting story.  Savings on average rose through the 1970’s where it hovered around 13%. Remember the financial lessons of my youth?  The rate declined quite rapidly in 1980’s and 1990’s, hitting a low of 2.5% in 2005.  Let’s not get into that now, but I am sure you are not surprised.  Something else that might not surprise you is that in recessions, the savings rate goes up.  People are nervous about their jobs and the economy, so they tighten up the purse strings. Just prior to the Great Recession, the savings rate was 3.4% and it rose to 6.7% by the end of the recession.  Though the recession ended in 2009, unemployment was slow to recede and though the economy was growing, it was off to a slow start.  That probably explains why the savings rate rose in the years following the recession as well.  The rate peaked at 11.8% in 2012 but then fell sharply thereafter, settling in around 7.5%, where it stood quite steadily leading up to the close of 2019.  You have heard me say it and may have also read it in the press.  The consumer was largely responsible for the most-recently-deceased longest economic expansion in history. The consumer, spending most, if not more than their incomes has driven the economy.  The current crisis wrote the last chapter on the expansion, and as you may suspect, changed the course of household savings.  In April of this year the household savings rate hit 32%!  The reasons are clear. Not only was unemployment rocketing, but consumers were denied access to locked-down businesses.  There are also some anomalies in the number as many stimulus checks, considered disposable income, were saved and not spent, despite the best intensions of lawmakers.  In order for the US to achieve the type of economic growth it enjoyed in 2019, consumers will have to get back to their spending ways.  That means saving less and buying more.  According to Bloomberg Economics, consumers contributed +1.8% percentage points to last year’s +2.3% GDP growth.  The last read of the household savings registered a slight decline to 23%, which is likely due to a slight easing in restrictions.  With a recent surge in virus cases and many states slowing or reversing re-openings, many households will find it harder to spend their incomes, even if they would like to.  This, of course, doesn’t mean that consumers will never spend again.  It simply means that the recovery may take a bit longer than we would hope (U-shaped instead of V-shaped).  Good for savings and bad for spending.

 

THE MARKETS

 

Stocks dropped yesterday selling off in the close as investors took profits off the table and eyed the growing number of surging US states.  The S&P500 fell by -1.08%, the Dow Jones Industrial Average sold off by -1.51%, the Russell 2000 Index gave up -1.86%, and the Nasdaq Composite Index slipped by -0.86%.  Bonds rose and 10-year treasury yields slipped by -4 basis point to 0.63%.

 

NXT UP

 

– Consumer Credit (May) is expected to have slipped by -$15 billion compared to a -$68.77 billion slide in April.

– EIA Crude Oil Inventory (July 3) is expected to show a -3.1886 million barrel decrease in inventory compared to last week’s -7.195 million barrel pullback.

– Atlanta Fed President Raphael Bostic will speak today.

– Bed Bath & Beyond will announce earnings after the bell.

 

daily chartbook 2020-07-08