The Week in Review
No Growth Eclipse
- Consumers: Alive and Spending
- Sturdy Household Balance Sheets
- AI on the Air
- Looking Ahead
Relative to reality, the fear of stock market volatility returning remains greatly exaggerated. Still, yesterday—for a day—it did rear its head.
The Dow Jones Industrial Average’s 1.2% decline Thursday was the first day in 64 when markets moved more than 1% in either direction—the longest such run of market calm in more than two decades. Like all streaks, this one had to end at some point, yet its conclusion does not signal a new chapter in market turmoil, nor does it worry us one bit. The fact that stock markets have been placid in the face of heightened geopolitical tension and domestic political tumult throughout the summer is strong evidence that these macro concerns are really just standard fare—“history may not repeat itself, but it does rhyme,” as the saying goes.
The week also brought to mind the old Jewish proverb, “Ask not for a lighter burden, but for broader shoulders.” We believe that the way we’ve built our fundamental and tactical strategies provides those broad shoulders in good times and bad. One of our core investment principles is diversification, owning a mix of investments driven by different economic and business factors is a practical response to the reality of markets that are burdened by a constant and ever-changing mélange of concerns. Our strategies are designed to shoulder such burdens and concerns, and we believe they have a demonstrated track record of doing just that.
We remain focused on economic and corporate facts and fundamentals rather than disturbing events and political sturm und drang. The trend of slow and steady economic and market growth persists—both here and abroad.
For the year through Thursday, the Dow Jones Industrial Average has returned 11.8%, while the broader S&P 500 has gained 10.0%. The MSCI EAFE index, a measure of developed international stock markets, is up 16.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has fallen to 2.47% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.2% for the year; weeks like this one are a good reminder of the risk-absorbing value that bonds provide in a portfolio, despite low yields.
Consumers: Alive and Spending
Consumers are in solid shape. Rising wages and the lowest unemployment rate in 16 years all create a willingness and ability to spend. This week’s retail sales report showed a strong spending surge in July as well as an upward revision to June’s numbers. The gains came on the back of improved car sales; the second-biggest purchase consumers make next to buying a home.
Amazon’s “Prime Day” promotion in July boosted sales at non-store retailers. It’s no wonder that with some 85 million Prime accounts, Amazon has contributed to a huge increase in e-commerce over the past decade.
And while problems still persist for many brick-and-mortar retailers, consumers spent more at home-and-garden centers and at many recently beleaguered department stores last month as well. We expect to see gains continue through the back-to-school shopping season—traditionally second only to the year-end holiday rush at check-out counters both virtual and corporeal.
It’s no wonder then that consumer confidence remains high, as the Reuters/University of Michigan consumer sentiment index rose by 4.5% for the month in the preliminary August survey to its highest level since January. A confident consumer is a consumer who spends.
Sturdy Household Balance Sheets
How does this confident spender mesh with this week’s headlines about household debt levels reaching all-time highs? The Federal Reserve’s report that American household debt hit a post-financial crisis high of $12.8 trillion in the second quarter put the rise squarely on increased mortgage obligations, a strong quarter for new auto loans and a rise in credit card balances. To us, these are all signs that the consumer is borrowing primarily to buy large, durable items they are confident they will be able to pay off over time. Yet the headlines only provided one side of the equation, ignoring the overall net worth and incomes of those same households.
To put it in real-life terms, here’s a simplified example. How would you respond to an unexpected $400 car repair? Not welcome news for any of us, though that bill means one thing if you are living paycheck-to-paycheck and quite another if you have an emergency fund and are regularly saving money. And the $400 cost to repair a rusty jalopy is different from spending the same amount to fix a 2014 Lexus. So more context is needed on that $12.8 trillion figure. For one thing, our population has grown, so that debt is spread across more households. Incomes are up as well, which means there’s more money available to service that debt, and then there’s inflation (however tepid) to factor in.
Here’s a better way to look at it. The Fed’s household debt service ratio—a comparison of debt payments to disposable income—provides a reality check. While the absolute level of debt is at a record high, the household debt ratio of 10% is about as low as it’s been since the Fed has been tracking the stat, which is another way of saying that households are quite capable of paying the debt they’ve assumed because their incomes have risen faster than their borrowing.
Given the media’s shortcomings in this regard, we thought it was worth taking the time to put this data in perspective. Just as it’s one thing to see the Dow drop 275 points when the index is at 6000 and another when it’s at 22000, the way household debt levels were reported this week only showed one eyeball-grabbing side of the story. Context matters.
We enter summer’s final stretch with a light slate of economic reports next week, which includes instructive reads on manufacturing and the service sector (and their internal job components), new and existing home sales and durable goods. Of course, such light fare is served on a heavy political and geopolitical tray—nothing new under that sun, so no matter what, we hope you will gain some peace of mind knowing that we will keep calm and carry on.
Please feel free to contact Andrea Johnson at 617-559-3413 if you'd like to learn more about our tactical or fundamental strategies.
Please note: This update was prepared on Friday, August 18, 2017, prior to the market’s close.
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