Quote of the Week

 “Courage is the first of human qualities because it is the quality which guarantees all others.” – Winston Churchill

Tech Corner

Last week the equity markets were up with the Dow leading the way up +1.80% and the Nasdaq trailing up +0.73%. So far this week as of Tuesday’s market close the equity markets have given up all of last week’s gains. What is indicative of this bear market is that the tech heavy Nasdaq always trails the Dow and the S&P 500. Year to date the Nasdaq is down -27.66% as of last Friday.

All the three major indexes are showing technical tops in this recent rally. Combining the technical setup with a weak forward outlook on the economy, the markets are setting themselves up for another pullback. However, to have that pullback there needs to be some catalyst in place. The catalyst might come from hawkish rhetoric from the Fed Chairman Jerome Powell who will speak at the end of the month on the 30th or possibly more negative news from China regarding their protest and lockdown policy. We are just waiting with bated breath on what will cause this market to turn to the downside.

I hope you enjoyed last week’s cartoon. I am going to repeat it this week. I want to do a deeper dive into the health of the consumer. The BS coming out of Wall Street says the consumer is in fine shape. I disagree. If you only read the headlines, you would be convinced this year’s holiday shopping season kicked off with a bang.. After all, “Black Friday sales raked in a record $9.12 billion”. Sounds pretty great, right?  Here’s the actual data behind that headline.

As you can see, Black Friday online shopping sales peaked at $9 billion in November 2020 which was a solid 22% increase over 2019. Then last year dipped just a tad to $8.9 billion. And now this year, the figure is back above 2020’s total at $9.12 billion.

When you consider that Black Friday sales has grown at an average annual rate of 20% per year between 2014 and 2020, but were essentially flat for the past two years there is no real reason to celebrate this year’s “record” spending.

In response to the 2020 COVID-19 pandemic, the U.S. Government helicopter dropped free money into the wallets of most Americans. This chart shows the effect that had on consumers’ excess real disposable income.

The steady blue line shows the trend in disposable income since 2013. It’s increasing, but just ever so slowly. The sharp spikes in 2020 and 2021 show the effect of the helicopter money hitting consumers pockets. Now real (i.e., inflation adjusted) disposable income is now below trend due to the fact wages haven’t kept of with inflation. Every bit of the pandemic stimulus money has been spent by most consumers.

The final chart is especially alarming.

The red line shows credit card balances. The blue line shows savings rates.

These two lines are clearly what I would call “the tale of two American consumers” and how the now dried-up stimulus money is affecting their behaviors.

Imagine there are only two types of American consumers: savers and credit card “swipers”. The red line shows that the credit card “swipers” used the stimulus money to pay down their outstanding balances. Some probably brought their balances to $0. Others were happy to just ease off of their max credit limits.

Meanwhile, folks who shun debt and value saving used the free money to bolster their savings. You can see two spikes in the savings rate in 2020 and 2021 reaching a massive 30% rate not seen before this chart.

But most importantly those trends reversed from mid 2021 onward right around the time the Consumer Price Index or “inflation” crossed over 5% for the first time in decades and has since risen to over 8%. This was a perfect storm working against the American consumer: the free money was gone, and everything got more expensive.

The red line shows credit card balances began to climb again, hitting new highs in 2022. This means people are now living off their credit cards which can’t continue. By the way, credit card applications are way up this year. Meanwhile, the savings rate is now back down to the long-term average of 3% to 4%.

Due to the fact that 70% of our Gross Domestic Product (GDP) comes from the consumer, it is clear that the economy is in trouble and will most likely be in recession in 2023.  Thus, spending will be down which leads to corporate earnings being down which leads to the stock market being down.

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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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