Savings Rates are Back to Historic Levels. Here’s What it Means for Investors

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.

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U.S. Consumer Confidence Returns to Pre-Pandemic Levels

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®

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.

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The Sevices Sector Mean Reversion Continues

Key Points

• The ISM Services report1 for March highlights the surge we have been expecting.

• Job growth, particularly across services sectors, continues to recover strongly.

• Consumption of services should continue through summer until it levels off.

I have written about the mean reversion opportunities across many important spending categories for six months. Monday’s ISM Services report highlights the robust recovery we are seeing across many of 2020’s laggard industries like travel, restaurants, and leisure services. As consumers were stuck in their homes and not able to gather as they love to do, the durables side of the economy experienced a historic renaissance. The global pandemic disrupted supply chains across the world while the stay-at-home mandate created wicked demand for all kinds of consumer durables. If you have tried to buy a refrigerator or washer/dryer lately you know what I mean. The shipping delays have been unprecedented leading to strong pricing power for the leading brands serving important consumption categories. While many of the supply chain issues are in the process of being solved, a new pick-up in demand is happening across the services sector. Many of the leading brands serving this sector had very difficult years last year but the tide is turning, and consumer demand is snapping back aggressively. As investors across important consumer trends, we are very excited about the services sector exposure we currently have. For perspective, I have inserted a chart of the ISM Services report that goes back to 1997. As you can see, the services sector and readings from ISM have never been higher. When the rubber band stretches one way too far, the snap-back is often just as fierce in the opposite direction. That’s what we are seeing now and why many of the top services stocks are sitting at all-time highs even as their businesses are just now starting to recover. Reminder: a reading over 50 indicates growth in the services sector so a 63.7 reading says there’s epic demand as the economy opens more broadly and vaccination rollouts continue. March is the first month the Services report has reached the recent 64.7 level seen in ISM Manufacturing.

Source: Bloomberg

The recovery appears to have multi-month legs before it should be expected to revert back to a more normal range. Supply chain issues and a lack of sufficient labor (why work if you’re receiving unemployment benefits) are two key reasons the most in-demand brands will have strong pricing power which we will start seeing in quarterly earnings reports. In my opinion, analyst estimates are too low for many of the services stocks and revisions will begin once we start reporting earnings later this month. Everyone expects a return to travel and eating out etc., but I see no real evidence of this knowledge when I look at the revision trajectory from sell-side analysts. There’s a big ah-ha moment coming for many of these services-related stocks.

Think about the services that are just beginning to open across the country. The pent-up demand for many of these services will be historic for the bulk of this year. Things like: movie theatres, theme parks, air travel, restaurants, hotels, Airbnb’s, sporting events (this week’s Texas Rangers game was at full capacity), and casinos are seeing strong interest. Last week I took the family for a 2-day quick vacation for our daughter’s spring break and the hotel was packed and prices were high. Hotels and airlines in particular should experience historic pricing power until we get back to normal.

Then there’s the not so obvious potential recovery industries like the pent-up demand for elective surgeries, long overdue doctor visits and the prescriptions being written post-visit. Additionally, the apparel industry should see a strong snap-back as people purchase “going-out” clothes, cosmetics, shoes and accessories. Here’s the rub, very few portfolios have sufficient exposure to the services and companies that should experience strong rebounds.  Sometimes the most obvious opportunities get overlooked.  We are very excited about the exposure we have to this important sector.

The Employment Report, March 2021

There’s no doubt, hiring has picked up. I suspect hiring across the services sector would have been even more robust were it not for the extension of unemployment benefits. Total nonfarm payroll rose by 916,000 in March as the unemployment rate fell to 6%. Real unemployment is likely a bit higher, but the trends continue to move in the right direction. Within the report, gains across leisure & hospitality, public and private education, and construction were the most favorable. Furloughed employee hiring was strong as many laid off workers returned to their positions. With more people having jobs, more consumption will occur and the brands that we favor most in consumption categories should see strong revenue and earnings trends. Here’s the inputs that drive consumption:

Consumption capacity = the sum of wages and all income + unemployment benefits + savings rates + household net worth gains + the amount of revolving credit card availability + consumer sentiment.

For now, wages are strong, many are rising, unemployment benefits are still coming, savings rates are historically high at over $1.5 trillion, and debt to total household net worth are at a 40-year low. All that spells positive trends for continued and accelerated consumption. I call that goldilocks for the consumer and consumer stocks.

Consumer Services Stocks Appear Very Attractive

The market is a discounting mechanism and stocks tend to see the future before the actual data proves the thesis. Nowhere is that more evident than in the stock charts of many of the top services brands. Great businesses on sale will always attract buyers and the recovery trajectory in stocks across services is clearly in place as many names hit 52-week highs. We still need the confirming evidence of the recovery which should begin to arrive this earnings season and with further confirmation in the July reports. This should lead to further positive revisions and attractive stock price gains. Again, everyone is talking about this obvious leisure recovery but very few investors have sufficient exposure to benefit from it.

Investing in the most relevant, admired brands serving the services sector has never been easier.

1The ISM Report On Business (ROB), also known as the ISM Report, is the collective name for two monthly reports, the Manufacturing ISM Report On Business and the Non-Manufacturing ISM Report On Business, published by Institute for Supply Management.

Disclosure:
This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest 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 Accuvest 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.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, 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.

For all things Alpha Brands please visit globalbrandsmatter.com

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Dynamic Brands Blog - Updated Bi-Weekly

For more insight into consumer trends, market outlook and portfolio positioning I share my thoughts bi-weekly on my blog!

Bloomberg Interview: Markets, Portfolio, Brand Positioning

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DISCLOSURE:

This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest 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 Accuvest 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 of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.