It appears that the S&P 500 has settled into a trading range after making a run at its all-time high earlier this month. The index currently sits about 8% from record territory after dropping as much as 35% following the COVID-19 outbreak. The Nasdaq, which is top-heavy with several highly influential technology stocks, is currently trading very close to its all-time highs. In my estimation, the stock market’s strong rebound in such a short period of time reflects a couple of factors. First, investors believe that the inflection point, or trough, for the economy has already been reached, and that the recovery will continue unabated. Second, investors are emboldened by the massive amount of monetary and fiscal stimulus, with the promise of much more to come if needed.
Given the US consumer’s importance for our economy (consumer spending represents close to 70% of GDP), we wanted to take a look at a few important barometers of consumer health to gauge how much of the rebound in stocks can be justified by the progress to date. So without further ado…
The first chart shows that through May of this year, the number of people classified as employed (red line) was just 137 million – a stunning decline from about 159 million at the end of 2020 and below the worst levels during the Global Financial Crisis. The ranks of the unemployed came to 21 million in May, far exceeding anything we’ve ever seen before (we understand that the population has grown, but still . . .)
The next chart shows Retail Sales through the month of May. Stocks rallied sharply on the day the May data was released (June 16th) because there was a sharp rebound from seriously depressed levels in April. Still, the May figure only got us back to the levels of mid- to late-2017.
Next we show monthly data from the Bureau of Labor Statistics for Personal Income, Personal Spending and Personal Saving. We only have figures through April for this data set as the data for May is not released until next Friday, June 26th. In any case, you will see that although Personal Income (blue line) surged as a result of expanded unemployment benefits and government stimulus checks, Personal Spending (black line) plunged to levels last seen in 2014. The net effect was a massive increase in Personal Saving. In fact, the Personal Savings Rate, which is the ratio of Personal Savings to Disposable Personal Income, surged to a never-before-seen rate of 33% in April!
Finally, we show that Consumer Confidence, as reported by the Conference Board, stabilized in May in the mid-80s. However, those levels have not been seen since mid-2014 either.
You may have guessed what our next chart will show. Despite the stark and continuing weakness in consumer data, the S&P 500 is within earshot of the all-time highs from February of this year!
We think the next big pieces of the puzzle may come next Friday when Personal Income, Personal Spending and Personal Saving for the month of May are released. We must see two things for a chance for this stock market rally to resume. First, we need to see supporting evidence for the strong bounce in Retail Sales reported for May. We need to see that the consumer is willing to spend, rather than save, more of the windfall they have received from the federal government. (Is that the most responsible thing for nervous consumers to do right now? That’s a completely different question, and one that was addressed in our June 4th Market Commentary that talked about the “paradox of thrift.”) Next, we need to see continued stabilization, or better yet improvement, in Consumer Confidence. These metrics should be highly correlated, meaning that if we see improved spending, it is likely that savings rates will decline from record highs and that confidence has continued on an upward trajectory. Still, we must see the actual data for stocks to continue on an upward path. If each of these metrics don’t show the same positive trends, there might be some reticence on the part of investors.
The bottom line? The economy is not the stock market, and the stock market is not the economy. However, the two cannot diverge too much over extended periods of time. Either the economic rebound will gain momentum and close the gap with the stock market, or stocks will fall to reflect a slower-than-expected economic rebound. The outcome may be determined by the success with which we are able to manage any secondary COVID-19 outbreak. Or there may be some other factor that influences the economy or stocks. But until there is more clarity, it may make sense to play a little defense.