The Strange Spread No One’s Talking About

“Feeling good, like I ought to.”

My three children sang the lyrics to Surfaces’ “Sunday Finest” over and over in the course of the 14 hours we spent within the automotive throughout their spring break trip.

And as I attempted my finest to take a break from work whereas I used to be with my household, the catchy pop tune nonetheless acquired me fascinated with the temper of shoppers proper right here … are we feeling good or not a lot?

In spite of everything, quite a bit has modified previously six months.

Jobs are plentiful, wages are rising and family wealth is hitting the best ranges ever. However costs for almost the whole lot are surging … from meals to fuel, even used vehicles.

So, are shoppers feeling taxed by inflation, or empowered from the wealth impact and rising incomes?

Since client spending makes up 70% of the economic system, it’s an vital query. And the reply has massive implications for company earnings and inventory costs.

Wealth Inflation or Simply Inflation

By the numbers, issues appear to be trying up for the patron.

The latest jobs report reveals the unemployment charge at simply 3.6%, whereas wages jumped 5.6% in comparison with final 12 months.

Asset values maintain going up too. Like dwelling costs that climbed 19% final 12 months … the most important acquire on file. And inventory costs are hovering close to all-time highs.

That’s making a wealth impact for households whose collective web price topped $150 trillion for the primary time ever on the finish of 2021.

On the similar time, the most important surge in inflation in 40 years is taking a giant chew out of that excellent news.

Take fuel costs, for instance. The nationwide common not too long ago peaked at simply over $4.25 a gallon … the best ver. I definitely felt the ache on the pump driving over 700 miles final week!

However again to the query about prevailing client optimism … or lack thereof.

As a result of two key surveys of client temper are at the moment telling completely different tales, and that’s traditionally been a warning signal for traders.

Survey Says… “It’s Difficult?”

This isn’t an unprecedented scenario, nevertheless it nonetheless may be trigger for concern.

On one hand, The Convention Board’s Client Confidence Index stays at excessive ranges. However one other common gauge from the College of Michigan (UofM) has plunged to the bottom stage in a decade.

Right here’s why…

The Convention Board’s measure locations a higher emphasis on the roles image and emotions concerning the general economic system. The UofM survey, alternatively, is extra involved about your private scenario and funds.

And when a giant hole opens up between the 2 measures … be careful. That’s as a result of it reveals shoppers have gotten extra detrimental on their private scenario regardless of perceived power within the economic system.

That change in temper can result in dicey occasions.

You’ll be able to see that within the chart under from SentimenTrader.

Discover different occasions when the unfold between these client surveys turns into deeply detrimental … like earlier than the dot-com bust, the 2008 monetary disaster and simply earlier than the financial shock from the pandemic. As you may surmise, inventory costs didn’t fare nicely both.

(Click on right here to view bigger picture.)

Now, this alone isn’t a cause to dump shares and go to money. However it does spotlight the significance of constant to trace the ache factors for shoppers, and the way that will affect the outlook for spending.

And that’s why it’s extra vital than ever to remain centered on the Huge Image. As we speak’s markets are displaying short-term power, however with out the religion of shoppers that might change very quickly.

By the way in which, the following line of these “Sunday Finest” lyrics finish with “by no means harassed…” I’m unsure shoppers really feel that method for the time being.

Finest regards,

Clint Lee
Analysis Analyst, The Bauman Letter