Weekly Investment Strategy
Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- Child Tax Care Credit A New Source Of Fiscal Stimulus
- Wealth Effect Has Benefitted Consumer Confidence
- Withholding Taxes May Keep Reaching New Record Highs
Amazon hosted its 6th Annual Prime Day this week, and consumers spent a record $11+ billion—a hopeful sign of what’s to come during the critical back-to-school and holiday shopping seasons in the second half of this year. This impressive sales figure is inclusive of results from similar bargain campaigns run by Walmart, Target, Best Buy, and Kohl’s, as these retailers were not going to stand idly by while Amazon, which may soon become the largest retailer, enjoy all the sales. But instead of focusing on the tactics companies are employing to capture critical e-commerce market share—a trend that should endure well beyond the pandemic-induced acceleration—we’ll focus on the broader strength of the US consumer. As the US economy reaches it peak growth in the recovery process, the consumer will remain the prime mover of economic growth over the next 12 months.
- Bottom Line – The Prime Factor For Growth | On the heels of faster than expected vaccinations, consensus economic growth forecasts for the year have been revised more than 2.5% higher (to 6.6%) since the start of the year, and may surpass the 7.3% growth rate from 1984 to become the best year of economic growth since the 1950s! While we’ve seen many new records and peaks throughout this recovery process, one of the most remarkable has been the rebound in retail sales. Core retail sales, a direct contributor to GDP, are now 18% above pre-pandemic levels. The good news is that we do not anticipate this strength dissipating. In fact, there are a number of supportive factors that suggest the resiliency of the US consumer will not waiver.
- Congress Will Continue To Prime The Pump | Congress has spent ~$51 billion in stimulus-related unemployment benefits so far this year, but only anticipates an additional $16 billion in outlays for the remainder of the year as the supplemental federal unemployment benefit expires in September. With this milestone nearing, many have questioned whether it will negatively impact spending capabilities at a critical time of the recovery. Our thought is that the start of the Child Tax Credits on July 15 (which itself will provide a stimulative boost of ~$100 billion) should more than address this perceived loss. Even more impactful, if the provision is extended for the maximum permissible period through budget reconciliation, the cumulative cost would be $1.6 trillion, equating to just under 1% of real GDP/year.
- Wealth Effect In Its Prime | The ‘present situation’ (e.g., how do you feel today) subsector of the Consumer Confidence Index has rebounded nearly 50 points over the last three months—the largest gain on record. Bolstering confidence is the aggregate increase in asset prices (includes real estate, equities, and debt instruments), that are up 25% on a year-over-year basis—the fastest pace since at least 2002. Between this overall rise in wealth and the $2 trillion in excess disposable income due to stimulus and savings, consumers will have the means, not just the desire, to spend as the economy sustainably reopens. To add, while rising shipping costs and low inventories limited the magnitude of the some deals available during this week’s consumer events, consumers still found a way to notch a record spending day!
- Consumers Primed For Action In Post-COVID World | On average, states have administered the first dose of the vaccine to just over 50% of their population, and real-time activity metrics are reflective of consumers being more willing to partake in some of their favorite pre-COVID activities. Airline traffic is surging, restaurant bookings are within reach of pre-pandemic levels, and hotel occupancy rates are at a post-pandemic high — just to name a few. Therefore it should be no surprise that the composition of spending has shifted. Last May, some of the leading spending categories were food and beverage stores, non-store or online retailers, and building materials. Fast forward a year later, and consumers are splurging on restaurants and bars, clothing, and recreation. As we further distance ourselves from the pandemic, consumers should feel increasingly comfortable in returning to their normal activities, which should further benefit the service-oriented spending categories.
- Priming For Labor Market Improvements | Given the labor market improvements that we’re expecting in the months ahead, we don’t believe that withholding taxes, which are currently at a record high, have reached their peak. With a record number of people quitting their jobs and a staggering nine million job openings remaining, we expect solid job growth ahead. With the percentage of small businesses planning to hire at the highest level since at least 2001, hiring is likely to accelerate. Assuming we create 500k jobs a month over the next year (six million total jobs) at the median salary of $35k, that would equate to an additional ~$210 billion (annualized) of spending power. As a result, robust job growth should only heighten the already strong spending capabilities of the US consumer.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.