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The Economy is Experiencing Trouble in 70% of Sectors


Sep 1, 2023

Equities have experienced a rebound in the past week, ending August on a positive note. The tech-heavy Nasdaq has been leading the charge, thanks to strong earnings from companies like Nvidia, Salesforce, and Splunk, as well as anticipation for Apple’s upcoming iPhone 15 release and the overall excitement around artificial intelligence. However, the rest of the market has been lagging behind throughout 2023.

While Big Tech is currently driving the rally, the health of the consumer, who accounts for approximately 70% of economic activity, appears to be declining rapidly. If this trend continues, it is unlikely that the economy or equities will perform well for the rest of 2023. The state of the average consumer is concerning, especially with inflation at four-decade highs. According to a July survey by LendingClub, 61% of Americans are living paycheck to paycheck, up from 59% the previous year when inflation was even higher. Additionally, a majority of Americans are now carrying revolving debt on their credit cards instead of paying it off completely, a first in history. Total credit card debt recently surpassed $1 trillion, and 401K hardship loans have increased by 36% compared to last year.

The average mortgage rate has reached its highest level since 2001, coupled with a shortage of available homes due to homeowners not wanting to give up their low mortgage rates. As a result, housing affordability has hit a nearly four-decade low. These challenges for the consumer have been reflected in disappointing quarterly reports from various retailers, such as Macy’s, Dick’s Sporting Goods, and Dollar General. Adding to the concerns, the job market seems to be deteriorating, with job openings falling below expectations and a significant loss of full-time jobs.

Furthermore, there has been a sharp increase in layoffs, with U.S.-based employers announcing plans to cut over 557,000 jobs in 2023, a 210% increase from the previous year. Consumer confidence has also been impacted, falling below expectations in August and seeing downward revisions for July.

Savings cannot be relied upon to support the struggling consumer either. Excess savings from Covid stimulus measures have been depleted, and the savings rate dropped to a level lower than during the financial crisis. Prospects for consumer spending also do not look promising, as the resumption of student loan repayments is expected to create a $75 billion annual headwind.

Additionally, manufacturing has been in a contractionary state throughout 2023, with PMI reports consistently showing levels below 50 for ten consecutive months. Leading Economic Indicators have also been down for 16 months in a row.

Given the challenges facing both the consumer and manufacturing sectors, it is doubtful that the economy can continue to grow and the markets can sustain their upward momentum. Just as a car with deflating tires cannot maintain its speed, it is difficult to have confidence in the market when such a significant portion of the economy is declining. As a result, my portfolio remains cautiously positioned in safe, conservative investments like short-term treasuries. Wisdom lies in combining old wisdom with new wisdom, not in mixing old wine with new wine.

By Editor

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