The Word from Main Street

Market Update for the Week of June 10th, 2024

The resilient economy gets more credit. ClearBridge Investments believes improving credit spreads are consistent with diminished risks and rising stock valuations, which is an encouraging development for long-term investors. Below is a summary of the most recent recession Indicators report:

Key Takeaways: According to Jeff Schulze, CFA, Head of Economics & Market Strategy with ClearBridge Investments:

~ Narrowing risk premiums caused Credit Spreads to become the first indicator to turn green this month while Profit Margins improved to yellow, moving the ClearBridge Recession Risk Dashboard closer to an overall green signal.
~ Credit Spreads were one of the first indicators to flash a warning signal as the Federal Reserve (Fed) ramped up its tightening campaign in 2022, but ultimately proved a false positive due to high-yield issuers locking in low interest rates and exhibiting higher quality than in the past.

ClearBridge Recession Risk Dashboard

Source: ClearBridge Investments

Consumers drove much of U.S. economic resilience and outperformance vs. other advanced economies. One of the main reasons the U.S. economy managed to avoid recession over the last couple of years is the surprise strength of the U.S. consumer (with an assist from government spending). It’s also why the U.S.’s economic recovery has outpaced those of other major advanced economies. Since the end of 2019, U.S. real (inflation-adjusted) consumer spending is up over 11% (chart below, blue line). But for the Eurozone (gold line), UK (green line), and Japan (red line), their spending rebounds from Covid have stagnated back at 2019 levels.

Source: Nasdaq Dorsey Wright

On top of faster growth, consumer spending also matters more to the U.S. economy. It’s almost 70% of U.S. GDP compared to roughly 60% in the UK and 50% in the EU and Japan.

Spending was enabled by fixed-rate mortgages, pandemic-era savings, and strong income growth. There are a few reasons why the U.S. consumer has been so strong:

1.    Many consumers locked in long-term low fixed-rate mortgages, partly insulating them from the Fed’s rate hikes (60+% of outstanding mortgages still have rates below 4%).

2.    U.S. consumers built up over $2 trillion in excess savings during the pandemic via stimmy checks, enhanced unemployment benefits, child tax credits, and being stuck at home restricting spending.

3.    Strong real income growth (4% YoY in 2023) thanks to still-high wage growth and a record 8.7% cost of living adjustment for Social Security in 2023.

4.    The “wealth effect” from rising property values and investment portfolios. When consumers “feel” richer, they’re more likely to spend. And across the income spectrum, household wealth is up 30%-45% since the start of the pandemic, thanks to a $12 trillion increase in home equity since 2019, along with the stock market rally boosting stock holdings, and higher rates increasing interest income.

5.    And…consumers added over $300 billion to their credit card balances since 2021.

All these factors helped U.S. consumers keep spending, even when inflation was at its peak!

Some spending supports have faded (excess savings, income growth) and signs of stress have emerged.

Source: Nasdaq Dorsey Wright

Spending is now slowing, particularly for big-ticket items that often require financing. In response to these headwinds, consumer spending growth has slowed. After rising +2.2% YoY in 2023, real consumer spending is up +0.4% YTD through April (chart below, blue line). Durable goods have been the biggest drag, with spending on them down 2% this year (black line). But, since durable goods tend to be big-ticket items – like cars, appliances, and furniture – that often require financing, it makes sense that today’s high rates would particularly impact durable goods. Services spending, on the other hand, is up +1% this year (green line). Since services account for 66% of spending – compared to just 13% for durable goods – services is big enough to keep headline spending rising, even with durable goods spending falling.

Source: Nasdaq Dorsey Wright

Services spending and solid labor market enough for consumers to keep supporting economy. So, consumers are still spending, but they’ve become more cautious. Consumers are opting for store brands more often, and companies are particularly worried about low-income consumers, who often don’t have much savings to fall back on. Still, as long as the labor market holds up and consumers keep seeing positive real income growth, consumer spending should continue to support the economy (and earnings growth)…just at a slower pace than before.

The current reading for the Nasdaq Dorsey Wright PR4050 Cash Trigger is: Money Market = 2.11% & U.S. Equity Core = 99.30%.For the PR4050 indicator to trigger and alert us when we should consider moving to cash, Money Market must be 50% or above and U.S. Equity Core must be 40% or below.

Source: Nasdaq Dorsey Wright

Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing Domestic Equities remaining in the top spot, while International Equities is solidly ahead of Commodities.


Source: Nasdaq Dorsey Wright

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These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. All indices are unmanaged and may not be invested into directly.

Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Nasdaq Dorsey Wright developed the indicators described above. They have been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. 

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