by Bryan Perry
April 19, 2022
For the past week, investors have been pummeled with negative inflation data and its effects on the economy. The data speaks for itself, and one would surmise that the doom and gloom implied by high inflation in an economy tied so heavily to consumer spending would have had a much bigger impact on the S&P 500 than the minor 9% pullback endured from its peak levels set back on January 3-4, 2022.
Soaring gas, food, home improvement, personal services, labor, travel, business-related investment, and anything else related to discretionary spending would almost surely affect spending patterns that reflect elevated prices. However, having traveled widely for the past couple of months, I can say with a relatively high level of conviction that the anecdotal evidence argues against this seemingly rational position.
Trying to make a call on “peak inflation” in this investing landscape is akin to catching mercury in a bottle. But this past week, there was an upside surprise with one data point that might be considered a “don’t buy growth stocks” moment. It bears close watching to see if it’s a fluke, or a pivotal moment.
This past Thursday, it was reported that the preliminary University of Michigan Index of Consumer Sentiment for April jumped to 65.7 (consensus 58.8) from the final reading of 59.4 for March. It was a notable improvement, although the April reading is still one of the lowest readings over the last 10 years.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Here’s how the data broke down, according to briefing.com:
Key Factors
- The Current Economic Conditions Index edged up to 68.1 from 67.2 (+0.9) in March.
- The Index of Consumer Expectations jumped to 64.1 from 54.3 (+9.8) in March.
- The year-ahead expected inflation rate held steady at 5.4%.
- 5-year inflation expectations were unchanged at 3.0%.
Big Picture
- Improvement was driven almost entirely by the Expectations Index, which jumped on improved wage expectations and a belief that gas price increases will moderate substantially in the year ahead.
This reading coincides with prior sentiment lows in April 2009 and April 2012, when the S&P suffered heavy downward pressure in a selling climax, followed by an extended uptrend. The market is so efficient at pricing in fear and greed that in a FOMO rally like late December or in a sell-any-and-all rally mindset that dominates the current narrative, history would argue that a change in trend is about to take place.
The thinking behind the potential pivot higher for the market this time around is the solid foundation of consumer spending demographics. As of 2020, consumers over age 60 are mushrooming in numbers:
“While millennials have dominated headlines in recent years, Baby Boomers (those born between 1946 and 1964) have continued to dominate consumer spending in the U.S. In fact, consumers over 50 now account for more than half of all U.S. spending. They are also responsible for more spending growth over the past decade than any other generation, including the coveted millennials.” (Source: usa.visa.com)
As a group, this over-50 crowd should continue to be a major force in U.S. consumer spending, especially the Baby Boomers over 60 over the next 5-10 years, according to Visa Business and Economic Insights:
“This is happening for two reasons: demographics—there are simply more consumers over 60 than there were 10 years ago—and behavior. Baby boomers, compared to generations that preceded them, are retiring later, holding on to more debt and maintaining budgets for travel and other discretionary treats.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The other big driver in this “Teflon U.S. consumer” trend is the staggering size of the transfer of wealth beginning to take place. Between now and 2045, a total of $84.4 trillion in wealth is expected to pass to beneficiaries (or charity) in the U.S., according to a report from Cerulli, a research and analytics firm. Most of the money (63%) will come from Baby Boomers. This passage of wealth is already underway.
The report — titled “U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021: Evolving Wealth Demographics” — found that Gen X will get the highest inheritance amount, at $29.6 trillion. The Millennials are next with $27.4 trillion, followed by Gen Y ($11.5 trillion) and boomers ($4 trillion).
To put this data into perspective, U.S. GDP is forecast to top $22 trillion in 2022, roughly a fourth of the amount of money that will go to our kids, grandkids, and great grandkids. Again, it’s a fantastic sum that should provide some basis as to the level of confidence consumers are exhibiting, despite high inflation.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This tsunami of wealth transfer will evolve over several years, but what it does is paint a landscape of incredible financial security for the next three decades of recipients. But getting back to the here and now, consumers are spending. Airlines raised guidance last week, and for good reason – most flights are sold out, hotels are fully booked for the summer, bars and restaurants are back to pre-pandemic sales levels, and the pace of home sales, remodeling, and big-ticket purchases is robust – despite high inflation.
When I view the current economic situation on the ground of the major metropolitan cities in the U.S, the phrase “it’s the darkest before the dawn” comes to mind. The market is down nearly 10% for the year, yet the labor market is strong – there are still job openings galore; weekly jobless claims are at historic lows, and there are pay raises all around. To my understanding, this has never been the case leading up to prior recessions. This evidence on the ground tells me that the market could be near a “selling climax.”
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
What Will it Take to Kill Inflation
Income Mail by Bryan Perry
U.S. Consumerism Is Bucking Inflation
Growth Mail by Gary Alexander
Naming the Decades of the 21st Century?
Global Mail by Ivan Martchev
The Momentum Move in Treasuries Continues: Where Will it End?
Sector Spotlight by Jason Bodner
Inflation Rates Will Normalize
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
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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