2009 Playbook Update, Wealthy US HHs 2021 Budgets

By in

Two items to cover today:

#1: The New York Fed was out with its 3x/year SCE Household Spending Survey, and 3 of their findings here caught our eye:

First: contrary to the popular narrative of wealthy households spending heavily while less affluent ones cut back during the COVID Recession, the Fed survey finds that through August 2020 it was +$100,000/year income households that trimmed spending the most. Yes, we assume much of these cutbacks came from discretionary categories… More on that in a minute.

Second: while this would be a serious concern were it to continue, the Fed survey also shows spending intentions over the next 12 months and here the higher income households say they plan to reaccelerate their spending going forward:

Finally, in terms of making money, let’s look at where affluent households plan to allocate their marginal non-essential 2021 outlays for some guidance on which sectors may have the best shot at better-than-expected earnings growth:

  • Transportation (i.e. motor vehicle sales): +4.0%
  • Recreation (vacations, leisure activities): +3.7%
  • Medical Care (discretionary as well as required): +2.6%
  • Clothing (online as well as in-store purchases): +1.7%

Bottom line to all this: the NY Fed SCE survey shows pent-up post-recession demand is most visible in America’s wealthiest households and in classic cyclically sensitive sectors. This is what one would expect to see, but COVID has added a twist to the customary pattern of early cycle consumer spending.

As much as Recreation is high up on the list of activities where affluent households plan to spend, travel – especially by air – is not especially popular just now. We don’t see that changing until mid-2021 at the earliest (i.e. when a vaccine is in wide circulation). That means other cyclical areas – Transportation, Medical Care, and even Clothing – have a chance to pick up some of that spending.

#2: An update on our 2009 Playbook given September’s S&P 500 volatility.

  • This paradigm compares the index’s performance from the March 23rd, 2020 lows until today to the rally after the March 9th, 2009 bottom.
  • As much as the Financial Crisis and COVID Crisis may seem different, both were sharp shocks to the US/global economy followed by outsized fiscal and monetary stimulus.
  • Even with the dramatic difference in market leadership now versus 2009 (Tech now, Financials then) and S&P 500 weightings (Energy was 13-15% of the S&P in 2009 vs. 2% now), the two rallies line up pretty well.

Here is the 2009 – 2020 S&P comparison:

Three points on this:

First: 2020’s S&P slipped behind 2009’s S&P in the second half of September for the first time since the March lows. We attribute that to market concerns over rising COVID case counts in the US and Europe as well as the ongoing delay in a CARES Act II.

This fits with our macro construct that all markets really care about in a crisis is seeing fiscal/monetary stimulus large enough to address the problem at hand.

Second: since the 2009/2020 lows don’t line up exactly (March 9th/March 23rd), we should look at how the S&P traded in October 2009 to assess how Q3 earnings releases affected stock prices back then. We are, of course, 2 weeks away from Q3 2020 earnings season.

Bad news first: the S&P was down 2.0% in October 2009. The index rallied 3.7% in the first half of the month as Financials reported earnings, but then gave it all back in the back half of the month.

Good news: the S&P then rallied 7.6% through November and December.

Third: there was no US general election in 2009, so one might be tempted to think the 2009 Playbook will go off the rails if something unusual happens after November 3rd, 2020.

Our thinking on this is somewhat more nuanced.

On the plus side, markets already know everything that can go right or wrong with the upcoming election. A delayed outcome will surprise no one. As Jessica recently showed, the comparison to 2000’s post-election volatility is deeply flawed since that was just when the US economy was slipping into recession and the dot com bubble was bursting in earnest.

On the downside, 2008 (the chapter just before our 2009 Playbook, S&P -38%) shows exactly what happens when you get a US general election in the middle of crisis. The worst-case scenario for stocks is a contested election outcome combined with a significant COVID second wave and economic weakness going into Holiday 2020.

Bottom line (1): the 2009 Playbook’s message is that the S&P 500 is stuck until the end of October because we’ve already discounted Q3 earnings and it’s too early to play an end-of-year melt up for stocks.

Bottom line (2): post-election uncertainty is not likely enough to derail the Playbook’s positive take on November – December returns unless a COVID second wave or other negative economic catalyst requires prompt fiscal stimulus while Washington is tied up in political wrangling.

Sources:

NY Fed SCE Survey Results: https://libertystreeteconomics.newyorkfed.org/2020/09/consumers-expect-modest-increase-in-spending-growth-and-continued-government-support.html