Those bullish on stocks have leaned on the notion that our economy is consumer driven and consumers have continued to consume, that may no longer be the case, reports Landon Whaley.
This week’s “Headline Risk” comes courtesy of our boy, Tony Dwyer, who was back at again exemplifying everything that is wrong with the Old Institution.
Dwyer was introduced on Fast Money as “one major Wall Street bull who is telling clients not to worry about the weak manufacturing numbers.”
In his opening salvo, Dwyer says the only development that will cause “a real sustainable, I’m getting out, oh my God” market environment is when “the consumer falls apart, and it’s really hard to say that’s happening, it’s just not happening.”
Ah, the “consumer is healthy” narrative is alive and well! Tony must be navel-gazing the headline retails sales growth because every other consumer-related data set out there is showing that the consumer is, in fact, falling apart.
As we’ve pointed out on many occasions, the U.S. consumer has never been more burdened by debt. Credit card debt is at a new all-time high, and credit card interest rates are at 20-year highs. Student loan debt is also at a new all-time high, and delinquencies just hit a post-crisis record of 5.2 million consumers. Auto loan debt just minted a fresh all-time high, while at the same time, the number of delinquencies experienced the largest year-over-year increase since 2010.
One look at the latest income data, explains why people are falling further and further behind. Personal income growth peaked in August 2018 and has since declined 28% over the last 12 months. This trend dovetails nicely with the most recent Census Bureau data, which indicates that real incomes have stagnated since 2018 at a median household income of $63,179. This income data explains why consumer spending growth has been in a downtrend since August 2018 and has now slowed in five consecutive months. The bottom line is that income isn’t growing, and consumers can’t even cover their debt payments, which is why overall consumption is in a bear market.
As we discussed in last Monday’s U.S. Shift Work macro theme update, the macro picture on the service side of the economy is confirming this micro picture of the consumer. The ISM non-manufacturing PMI cratered to a three-year low in September, and history tells us that the 7.3 point spread between the non-manufacturing and manufacturing PMIs means that its highly likely the service PMI continues to decline for at least another six months.
Dwyer ends his appearance by saying he doubts U.S. corporations record negative Q3 earnings. I feel like I’m taking crazy pills, does this guy have access to data?
After everything was said and done with Q2 earnings, the S&P 500 had five of its 11 sectors with negative year-over-year earnings growth. You don’t even need my great and unmatched wisdom to know that Q3 2018 was the cyclical peak in S&P 500 earnings, and companies are now competing with that peak earnings growth rate (+24%) when they announce their Q3 2019 metrics.
This peak earnings reality is why 19 (of the 497 S&P 500) companies have already reported Q3 aggregated earnings growth of -18.9%! While this number will inevitably move back towards zero as more companies report, there is no doubt earnings growth will be negative; the only question is how many S&P 500 sectors will be south of the 0% line?
The headline risk bottom line is that the consumer-related data is unambiguous and continues to confirm that the consumer is not healthy, which means Dwyer is dead wrong, and our Retail-iaiton macro theme has got legs. Also, Dwyer’s corporate earnings perspective is shared throughout Wall Street. Not only is the Old Institution utterly unaware that the U.S. remains in a Winter Fundamental Gravity, but it's clear that we are one of the only firms prepared for the coming earnings recession and trading accordingly.
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