Negativity continues to circulate in the financial media and recently some well known economists at Morgan Stanley have focused their antagonism toward the US consumer. Some of the news we have already commented on in this weekly post include some horrendous existing home sales numbers and stubbornly high inflation. Now we are staring the restarting of student loan payments which will initiate quite a drag on consumer spending. There are some 28 million Americans with student loans outstanding and the payments will amount to something on the order of $16 billion monthly or about $190 billion annually. Considering the government owns a strong majority of these loans, that may help the annual budget deficit numbers look less horrific, but we have to wonder how well the economy will handle this drag on consumption.
Back to the Morgan Stanley commentary – their equity strategist Michelle Weaver joins the chorus of Morgan Stanley Wall Street watchers with some sobering thoughts. She joins JPMorgan trader, Brian Heavey who has turned quite negative on the US consumer and Mike Wilson, Morgan Stanley’s chief investment officer who wrote about the “consumer falling off a cliff.” From 20,000 feet her analysis shows that the American consumer has run out of the excess savings from Covid lockdown time. From there, her focus is on the weakening leisure travel numbers that have spread pretty much across the board of hotels, airlines, low-cost airlines and even luxury travel. Although an AlphaWise Consumer Survey shows that 58% of respondents do want to keep traveling, some are resorting to driving or taking trains to keep costs down to more modest budgets. A chart of the large airline stock prices concurs…
Obviously, these numbers can be partly due to the tightness in crude oil supplies and corresponding prices. But it still looks pretty soggy - especially considering how tight the Fed is clamping down with high interest rates.
There are many other economic fronts that aren’t looking robust either. One of the concerning things to us is how the economic numbers are being reported by this administration. We do our best to not get political in our weekly posts, but we have been watching economic numbers reported by our different government agencies for nearly three decades. Things have recently changed and NOT for the better. An example is the Bureau of Labor Statistics who reports on many economic statistics, but very notably the high-profile monthly payroll numbers. So far in 2023 EVERY SINGLE monthly payroll number was later revised lower (June later cratered by a whopping 50%!) For that to happen every month if the statistics were being reported honestly would be a 12-sigma event. Obviously, it is politically motivated and that is just one example. Personal consumption number, savings numbers and full GDP numbers are being adjusted later as well. We are wondering about a lot of government numbers now and it is not encouraging.
All this being said, the financial markets are still holding together quite well considering the negativity. September was a fairly rough month for most of the stock market averages, but the indexes as a whole are not outrageously priced like they have been in past bubble times (2000 and 2008 for example.) If the Fed is serious about “higher for longer” referencing the interest rates on the short end of the trading curve (overnight rates that are about 5.5% now) then some of the doom projectors could certainly be correct. These interest rate WILL break more things in the world economy if they remain this high or higher. We can’t time any of this and we can’t predict what the Fed will do in the near to medium term. If the turbulence in your stock portfolio over the last month is keeping you up at night you need to lighten up your positions. The last 25 years has brought wild volatility to our financial markets. Reduce your risk to the point that the next “March of 2020” event at the start of Covid doesn’t change your lifestyle.
Regards and good investing,