Key Points

• The U.S. Savings Rate just went parabolic again, that bodes well for consumer spending trends.

• Today’s rise in savings rates is very different & positive for consumption trends.

• Consumption capacity drives future spending. This drives positive GDP.

Personal Savings Rates are currently at 27% (Bureau of Economic Activity, April 30, 2021):

Wow is all I can say after looking at the BEA’s Savings Rate report. Total personal saving was $6 trillion in March which drove the savings rate just over 27% when you add the epic amounts of new cash people are getting. For perspective, savings rates peaked at 33% in April 2020 as the Pandemic was just getting started.  Spending is in our DNA, it’s quite possibly the most predictable phenomenon I know of. The government can halt our spending in certain categories but we will find a way to use that credit card and debit card and buy the things we want and need regardless of the economic environment. After the 33% peak, savings rates fell like a rock into November 2020 when they troughed around 12% and then began to rise slightly. It’s been a tough 15 months for all economies and consumers but thankfully business activity, vaccine rollouts, consumer confidence and future spending capacity appear to be on the mend. This month’s rapid rise in savings rates should not be surprising however, but it should prove to be a temporary situation. Savings rates have recently benefitted from continued unemployment benefits, one-time stimulus payments, tax refunds and wages.

Today’s rapid rise in savings is different & a very positive sign for spending trends:

The chart below is a very encouraging chart. It shows Savings Rate, Retail Sales, and Consumer Spending & Transactions on Consumer Services. Normally, when the white line of Savings Rates goes vertical, Retail Sales and Consumer Services & Card transactions go in the opposite direction as consumers re-trench. That’s what happened early in 2020 and during every other slowdown I could find. Historically, once savings rates go parabolic, a strong investment opportunity presents itself. When people start to feel more comfortable about the world and their personal situations, they begin to spend normally which drives savings rates back towards “normal”. That’s the situation I see in front of us currently.

The current situation is very unusual & robust. Retail sales, consumer confidence, and consumer transactions data did not fall off a cliff, they are all rising together. What does all this mean? It means continued good times are ahead for consumer spending via sustained retail sales and the consumer services recovery. Credit card use, travel plans, apparel purchases and other pent-up spending habits should get closer to normal.

There’s roughly $2.2+ trillion in forced savings that is now being released into the economy. 

The Consumer Services sector, our biggest overweight position, should be a major beneficiary as savings rates converge back towards normal. This is NOT a 1-year phenomenon, it will take a few years for the historic amount of savings to trickle through the economy making this theme stable & predictable. Exactly what we like inside a portfolio. Brands benefit most when consumers open their wallets.

Enormous amounts of consumption capacity has significant investment implications.

Let’s dig deeper into this chart and see if we can connect the dots to some opportunities. Reminder: the market has had a decent run YTD and under the hood, there appears to be a rolling correction under way. Volatility is the friend of long-term investors so please use whatever weakness we get over the coming days and weeks to upgrade your portfolio’s and add some consumer dedication because the above chart is very bullish.

Savings rates tend to be 7% over the long-term, that’s a very bankable base case. They are almost 4 times higher than that currently so we know this is well out of the “norm”. These types of events offer significant mean reversion opportunities. Is there any evidence this opportunity is currently beginning? Absolutely, look at the green and blue lines going vertical with the savings rate. That means consumer spending is already recovering nicely. We hear it in earnings reports from airlines, travel companies, consumer goods companies, and through the big bank earnings. Ignore the short-term noise of the markets and use weakness as an opportunity, this trend has significant legs. Virtually all of the hard and soft economic data is at the upper end of its long-term extremes so we all should expect this data to start to trend lower while staying at elevated levels. I have looked back over long periods of time and back-tested how equities perform as elevated data slows down while staying high on an absolute basis. There does not seem to be a high correlation between strong data falling and falling stock prices. Anything can happen at any time but the important thing to remember is the trend is your friend. The current trend of getting out into our neighborhoods and eating, drinking and getting back to our old lives is in full force. As employees of companies begin to go back into the office, upgrade their wardrobes, look to travel and see clients and prospects, a resurgence in many commerce categories will occur. It is about time. And then there’s the summer travel season, have you ever been this ready to explore outside of your local community? I certainly haven’t.

I think it’s time to embrace “normal” and the data says we are well on our way.

Disclosure:
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.