Key Points

• Overall U.S. Consumer Confidence for April rose to 121.7*, a very bullish reading.

• The Present Conditions Index & Expectations Index also rose strongly.

• High consumer confidence, excess savings & massive wealth transferring is bullish for spending.

April Consumer Confidence

Consumers drive roughly 70% of U.S. economic output. Collectively, we are a very important cohort to track for the overall direction and health of the economy. The consumer, here and abroad, is the most important factor driving economies which makes our actions and expectations key to the stock market. Whether we realize it or not, consumer spending and our sentiment towards spending is highly correlated to the direction of the economy, which is highly correlated to the direction of the stock market. This knowledge is what drove our team to create the Dynamic Brands equity strategy in 2016.

For perspective, I thought I would compare the important consumer confidence readings from today’s report to last April, 2020. What a difference a year makes. In April of last year, consumer confidence fell through the floor as the pandemic and fear spread around the world. Confidence readings fell from 118.8 in March 2020 to 86.9 the following month. That was the lowest reading in 6 years and one of the lowest readings since the survey was created. The moral of the story here: things are generally never as bad or as good as they seem in the moment and when we see extremes, there’s typically an opportunity to fade those extremes in search of something less extreme. Hurricanes don’t last forever. The bulk of readings and human experiences often fall between positive and negative extremes so it’s important not to over-react. Today’s high readings likely have a few more months of strength but those extremes should be expected to mean revert back to normal levels as the pandemic fears ease and the economy continues to heal. Here’s the good news, steady and high readings are bullish for economic activity, often the stock market and consumer stocks. That’s the future we see for the rest of this year where consumer confidence is concerned.

Consumer Present Conditions Index

This sub-index is based on consumers’ assessment of current business and labor market conditions. In April of 2020 the reading was 76.4, today it’s back to 139.6. I have to believe these readings are somewhat influenced by the stock market, housing prices and the current overall belief that a path to normal life is within our grasp. A continuation of the unemployment benefits into September is also very helpful where sentiment is concerned. I suspect when we see the overall GDP report it will be very strong and sustainable as more people get back to work and $2.2 trillion of savings, tax refunds and unemployment benefits begins to trickle into the economy. From a consumption perspective and a read-through into consumer spending focused stocks, some strong fundamental news lies ahead.

Consumer Expectations Index

This index is based on consumers’ short-term outlook for income, business, and labor market conditions. The index in April 2020 fell to 93.8. Today’s reading was 109.8, so continued improvement in expectations for better times ahead. What I like best about this report was the positive expectations for future income component. When we feel good about our income prospects, we feel better about making additional purchases of goods and services. I have written a few times in these blogs about our positive opinion regarding the U.S. consumer services sector in particular as discussed in “Don’t Ever Underestimate the Consumer.” This sector is by far our biggest overweight in the Brands equity strategy. Vacation intentions posted a robust increase in today’s report which bodes well for economic activity and spending in that badly hurt sector of the economy. Sadly, these companies are still struggling to find workers as many of the potential hires are being paid to not work through their unemployment benefits. Do not be surprised by a lack of services when you take your vacations this summer. Over time, this industry will get fully back on its feet and the services we love and expect will be back.

What’s the upside to this short-term situation of a lack of workers in the travel and leisure industries? Higher profitability and margins for the most well-run brands. Many of these businesses, out of survival, have now learned to stay profitable at much lower occupancy levels. If demand surges back but your cost structure is less, your margins expand and you likely outperform analyst expectations. When that situation occurs, stock prices often react favorably. That’s what I am expecting for Q2 and Q3 earnings reports. Everyone expects there to be high pent-up demand for travel and vacation spending, that’s likely in the current prices of these stocks. What is not built into stock prices currently is the higher estimate revision cycle that will come once these companies show higher profitability from their current predicament. Long-term, a poor experience and lack of services is terrible for brand loyalty but short-term its wonderful for profitability.

The Silent Boost to Consumer Spending: Wealth Transfer

With better job prospects that lead to strong income and confidence, consumer spending trends seem quite favorable for the rest of the year. With $2+ trillion collecting in the system, some of this money has begun to get unleashed into the spending economy. This excess savings should continue to be a stabilizing force in our consumption economy for a few years as savings rates normalize back towards normal levels around 7%. There’s an extra silent boost that I will write about in future blog posts: the largest transfer of wealth in human history is now underway. Baby Boomers and their parents, the Silent Generation have accumulated a massive amount of wealth over the last 5 decades. As the Boomer generation in particular ages, they will begin to pass their assets to their children and grandchildren. From a psychological perspective the results are very clear: when money falls into your lap, you tend to spend some and save some. The amounts to be spent each year from wealth transfer are harder to isolate but look around, it’s happening everywhere and by the year 2061, PNC Wealth predicts over $59 trillion will have passed from older generations to younger ones. A Wealth-X report shows about $15 trillion passing by 2030. That means a staggering amount of money is passing very slowly each year and then all at once upon full wealth transfer. Money passing from savers who spend to spenders who save is a very robust additional source of consumer spending that few people talk about. This transfer of massive amounts of money will affect GDP, retail spending, art, collectibles, and real estate markets over time. Because of this, the consumer services sector seems to have a very bright future.

Yes, the business cycle always matters and there is bound to be speed-bumps along the way, but the consumer spending thematic seems to have a very long and positive tail indeed.

*Source: April 2021 Consumer Confidence Survey®

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This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts.  The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.