The American Consumer is the Key to This Recovery
The U.S. labor market had a weak April. Many economists were caught off guard – the consensus was for the economy to produce 1 million new jobs, and instead, we saw a seasonally adjusted 266,000. To make matters more tenuous, U.S. consumer prices jumped 0.9% from March to April, marking the biggest monthly inflation increase since 1981.1
These mixed economic messages spurred worry about the actual strength and viability of the recovery. Many wondered if the very compressed recession would give way to a compressed recovery. There is a range of possible outcomes, but in my view, there is a good rule of thumb to consider when you’re unsure about the economic outlook: don’t forget about the U.S. consumer.
If you are having doubts about future economic recovery, you are not alone! The best way to handle any doubts and concerns is to focus on key data points and economic indicators that could impact your long-term investments, instead of giving into short-term, hasty decisions.
To help you stay focused, I am offering all readers an exclusive look at our May & June Stock Market Outlook Report. This report contains some of our key forecasts to consider such as:
- Zacks rank S&P 500 sector picks
- Zacks May and June view on equity markets
- What produces 2021 optimism?
- Zacks forecasts for the remainder of the year
- Zacks ranks industry tables
- Sell-side and buy-side consensus
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released May & June 2021 Stock Market Outlook2
The U.S. is a service and consumption-based economy. Consumption makes up roughly two-thirds (over 68%) of the entire economy3, a share that has consistently moved higher since the mid-1960s (chart below). Given that the U.S. is the biggest and most diverse economy in the world, and the U.S. consumer is the biggest contributor to growth, it is not a stretch to label the U.S. consumer as the single most important factor in the global economy.
Currently, there is debate over whether expanded unemployment benefits are needed, and/or whether American households needed three rounds of government stimulus. I won’t wade into those debates here. Instead, I want to focus on the economic bottom line that the policies have helped produce. For better or worse: the U.S. consumer, in aggregate, is in a very strong financial position just as the economy is set to fully reopen. There may be a time to bet against the U.S. consumer, but I do not think it’s now.
According to the Federal Reserve Bank of New York, consumers on average only spent about a third of each stimulus check, with many households either saving their money, paying down debt, or both. The key conclusion from the NY Fed’s surveys is that consumers have their strengthened balance sheets over the last year, which when combined with a full economic reopening, could support strong spending trends over the next year and beyond.5 Real (adjusted for inflation) disposable personal incomes are at all-time highs (first chart below), and household debt-to-GDP in the U.S. is still at a low level relative to the pre-2008 expansion (second chart).
Consumer strength and confidence have been showing up in retail sales. According to the Census Bureau, retail sales were up 51.2% in April 2021 from the previous year, which is to be expected given the low comparison with April 2020. But a better view of sales comes from looking at the jump from February 2021 to March 2021, which showed a 10.7% increase. As the pandemic risk decreased, vaccinations went up, and restrictions were loosened, the U.S. consumer re-engaged strongly.8
Sure, the Consumer is Strong, But What About Inflationary Pressures?
Fear of rising inflation has been a counter-argument to a strong U.S. consumer. If consumer prices rise too much, the argument goes, consumers could be discouraged from spending. It’s a valid concern.
I agree inflation poses a real risk. Neither the bond nor the stock market likes inflation surprises, and stocks have shown they can come under pressure if Treasury yields rise due to inflationary concerns. But I also believe that generally speaking, if Treasury yields move higher but corporate earnings continue exceeding expectations, it may not be much of an issue for the stock market. The problem scenario is if inflation is rising, rates are rising, and corporate earnings are falling short of expectations. Fortunately, earnings are firmly outperforming expectations, but as ever they will be a key factor to watch going forward.
Bottom Line for Investors
The prospect of a fully reopened economy, coupled with the past year of strong stock market returns, has pushed growth expectations considerably higher. Many investors wonder if everything has moved too far, too fast. I think it is a valid concern, but I also think it is important to consider the very healthy fundamental backdrop, with particular attention focused on the U.S. consumer. In my view, the consumer is not only ready to re-engage fully in the economy – but they are also in a good financial position to do so.
At Zacks Investment Management, we use our deep research resources to fundamentally analyze the market and economy, so we can make investment management decisions based on objective data. The insights about consumer spending, inflation, and corporate earnings discussed in this piece all play a role in the decisions we make every day for clients, and we lean on our decades of research experience to drive our approach.
With that being said, there is no definite answer to when a full economic recovery will take place. With so much uncertainty, investors may be tempted to make knee-jerk decisions, but these hasty decisions may not align with future financial goals. Instead, we recommend that investors focus on key data points and economic indicators when making financial decisions.
To help you do this, I am offering all readers our Just-Released May & June 2021 Stock Market Outlook Report.
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as: If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Black Rock. May 6, 2021. https://www.blackrock.com/us/individual/insights/dont-underestimate-us-consumers
4 Fred Economic Data. April 29, 2021. https://fred.stlouisfed.org/series/DPCERE1Q156NBEA
5 Black Rock. May 6, 2021. https://www.blackrock.com/us/individual/insights/dont-underestimate-us-consumers
6 Fred Economic Data. April 30, 2021. https://fred.stlouisfed.org/series/DSPIC96#0
7 Fred Economic Data. May 3, 2021. https://fred.stlouisfed.org/series/HDTGPDUSQ163N#0
8 U.S. Census Bureau. May 14, 2021. https://www.census.gov/retail/marts/www/marts_current.pdf
9 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.