by Bryan Perry

February 22, 2023

The investing landscape seems about as mixed and garbled as one could imagine, with conflicting data that show a lot of fragmentation between several sectors of the economy amid tightening monetary policy, and a stock market that is demonstrating resilience against what seem like mounting odds. Specifically, the bears point to an inverted yield curve, a hot housing component index within the CPI, lower oil prices, negative monthly manufacturing data, flat growth in industrial production, talk of a 50-basis-point hike at the March 22 FOMC meeting, record household credit, and a resumption of rising commodity prices.

United States Consumer Price Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It is widely understood that the consumer drives the U.S. GDP, and though anecdotal evidence would suggest that the consumer is doing just fine, the hard data would imply otherwise. To be sure, consumer spending was nothing short of spectacular in January, pouring into everything from new car purchases, travel, hospitality, entertainment, furniture, home furnishings, electronics, clothing, and accessories.

The key takeaway from the combination of inflation and retail sales reports is that consumers were spending freely on goods despite the ongoing inflation pressure. In fact, every single sales category showed a month-over-month increase, led by a 7.2% surge in sales at food services and drinking places.

Retail Sales Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This biggest retail spending surge in nearly two years seems to say, “Damn any inflation, full spending ahead.” Some pundits label this a strange and surreal admission that “life’s too short.” Others would call this “whistling by the graveyard,” arguing that all the stimulus and relief experienced during the pandemic infected millions upon millions of people with the idea that carrying extreme levels of debt is no big deal.

If the federal government has no problem running up $31.5 trillion in debt and handing the bill to our great grandchildren, some in the public may be thinking, “When the stuff hits the fan, I’ll just stop paying on my rent, cry foul, and when they come to repossess my super-sized truck, I’ll wait for the government to bail me out of my student loans and go tell my credit card issuers to go pound sand, because they shouldn’t have extended me that much credit in the first place. It’s not my fault I have no margin. I’m the victim! How much are Taylor Swift tickets? Sweet, I’m in. I’ll figure it out, but I won’t miss the show!”

I’m exaggerating, of course, but I’m not sure that I’m too far off base. The hard data corroborates some of my rant. According to the New York Fed, in their Household Credit and Debt report, released February 3:

“Mortgage balances shown on consumer credit reports increased by $254 billion during the fourth quarter of 2022 and stood at $11.92 trillion at the end of December, marking a nearly $1 trillion increase in mortgage balances during 2022. Balances on home equity lines of credit (HELOC) increased by $14 billion, the third consecutive quarterly increase and the largest increase seen in more than a decade; the outstanding HELOC balance stands at $336 billion. Credit card balances saw a $61 billion increase in the fourth quarter, surpassing the pre-pandemic high of $927 billion.

“Credit card balances now stand at $986 billion, after declining to $770 billion in 2021Q1. Auto loan balances increased by $28 billion in the fourth quarter, continuing the upward trajectory that has been in place since 2011. Other balances, which include retail cards and other consumer loans, increased by $16 billion. Student loan balances now stand at $1.60 trillion, up by $21 billion from the previous quarter. In total, non-housing balances grew by $126 billion.”

The share of all current debt transitioning into delinquency increased for nearly all debt types.

Total Debt Balance Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The bulls would contend that the air is coming out of the housing bubble and the spike in household debt is “unfortunate” for hard working people on fixed wages and salaries. Others say people must live within their means and must plan for reversals in markets or interest rate trends such as we’ve seen in 2022.

According to a Gallup poll taken in April 2020, roughly 150 million people, or 55% of all Americans own stocks in some form or another, so if the market recovers, we might have the means to pay these debts.

United States National Home Price Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The top 1% can handle 4% to 5% inflation just fine. They have the financial horsepower to cope with rising prices and rising business costs. Anyone over 60 can easily recall the mid-1980s, when many in that age range were buying their first home, and mortgages dipped below 10% for the first time in a long while. They celebrated like they hit the lottery. Today’s 7.4% mortgage rate is being treated as an OMG moment because most new home buyers have been living in a perma-low rate QE bubble since 2008.

News flash – 4% inflation is historically normal. From 1960 to 2021, the average inflation rate was 3.8% per year. Compounded, the price gain was 829.57%, so an item that cost $100 in 1960 cost $929.57 at the start of 2022. For January 2023, the year-over-year inflation rate was 6.4%. A lot has happened in those 60 years and the stock market has managed just fine. Jobs are plentiful, prices for goods produced allowed for decent profits. Household wealth grew, real estate appreciated, and America has prospered.

Consumer Goods Inflation Rates Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The vocal and polarized debate over the economy, S&P earnings, the health of the consumer, and the stock market’s P/ E valuation will continue to rage on, because there is simply no consensus yet.

This will continue to foster ongoing volatility until the bulk of the data begins to shed light on economic conditions – and specifically whether the eight rate hikes (and likely two more to come) are priced in.

Forecasting the future may be hard, but if one has good stocks in a portfolio, then sitting tight is probably the best plan of action. Sometimes it just pays to show patience.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Global Vise Tightens on Russia

Income Mail by Bryan Perry
Mounting Confusion About What Lies Ahead

Growth Mail by Gary Alexander
Explain This! Flat GDP + Market Crash = Soaring Tax Revenues!

Global Mail by Ivan Martchev
The Bond Market Now Looks to the Fed

Sector Spotlight by Jason Bodner
What Does an “Overbought” Market Mean?

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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