Talking Points – October 2021

October 27, 2021 – The Consumer Can’t Be Stopped

Inflation. Stagflation. Pandemic. Energy costs. Lack of Supply. Name your concern and the U.S. consumer, at least for now, does not seem to care. Personal consumption, as shown below, has surged to new highs well above pre-pandemic levels.

There are always plenty of factors to worry about with the economy and financial markets. For now, none of the current concerns are enough to keep the U.S. consumer from what they love to do…. spend. It might not always be what is best for their personal balance sheet, but it sure helps keep the economy and corporate profits strong.

October 20, 2021 – Are Rising Energy Costs Hurting the Consumer?

The cost of oil and natural gas have surged in recent months. At some level, the increasing cost of energy could reach a pain point for the consumer that harms the economy and the broader financial markets.

However, at least one key relationship shows, that we are not yet at that level. Below, we see that consumer discretionary stocks relative to consumer staples stocks are breaking out to a new all-time high. This is important, because if consumers were concerned about their finances, in part due to energy costs, they would be cutting back on discretionary spending and only buying those needed staples. The market doesn’t see that currently.

In fact, consumer staples stocks have been so weak relative to the rest of the market, that the sector is now at its lowest weight ever in the S&P 500.

Source: Strategas Research

The contrarian in us is intrigued by the staples sector being so unloved. However, of more importance right now, is that the markets view that the consumer is still in good health and buying plenty of discretionary items despite the rise in energy costs.

October 13, 2021 – Energy Prices

After amazingly trading to a negative number briefly in April 2020, crude oil is now all the way back up to $80. As big as this move has been, if compared to several other forms of energy, there could be much further to run.

One silver lining, is that energy as a percent of consumption for consumers has been declining for years. Hopefully, this means that the impact of rising costs will not hit as hard as historically.

Of course, there is no guarantee that energy costs will continue their climb. However, if they do, it will be critical to monitor not just the impact on the broader economy, but the effect that it will have both positively and negatively on various stock sectors.

October 6, 2021 – Expectations Reset

You will likely recall, how in 2020 expectations for the economy dropped rapidly with the onset of the pandemic. The actual data that came in were much better than expected, as shown in the spike higher below. Now, after several months of economic data coming in below anticipated, there appears to be an expectations reset with a turn higher.

Whether it is economic data or corporate earnings, the absolute level often does not matter as much as how it compares to expectations. As we begin the 4th quarter, there is plenty of noise to contend with going forward. Fortunately, a potential positive working in our favor is economic data looks poised to do better than many expect.

Source: Greg Towner, CFA, CMT