How Does a Weakening Consumer Affect Your Investments? Jarvis Update August 16, 2024

Earnings season so far has been a mixed bag. What does a weakening consumer mean for your investments? We address that question and much more in this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Hi, Brian. I'm here. I still have a little jet lag from my trip to Paris. But I'm here.

All that matters. Good to be back with you. It's been about a month since we've had a video, so we wanted to get back together with you and give you another market update. We've got plenty happening in markets as we move toward the end of earnings season. Two topics for you, as we usually do. The first is earnings review, and we're going to talk a little bit about the consumer. And then our second topic is going to be about interest rates, what segments of the market we think will benefit from lowering interest rates. Let's have a market recap before we jump in to the main topics. So first of all, the S&P is down about 5% over the last month. Tech-heavy NASDAQ is actually down around 8%. So market's a little bit in correction territory here. Worries have started to proliferate now that the Federal Reserve has been too slow to lower rates. We heard a couple of years ago they were too slow to raise rates. Now we're in the too slow to lower rates category. Interesting to hear that. Uh, the 10-year Treasury is now at 3.9%. Despite the fact that the Fed hasn't lowered rates officially yet, the market's starting to lower rates for them. So, well, with that all being said, what are your thoughts about what we've seen in markets over the last month?

Well, first off, we'd be remiss if we didn't congratulate our American athletes for their wonderful showing at the Olympics. And my voice is still hoarse from screaming from that thrilling USA men's basketball win over France.

Very good.

Speaking of screaming, the market is screaming. You're right, at the Federal Reserve Board. To get their butts going on lowering interest rates. And you mentioned the correction we've had over the last month or so. Some of that, Brian, is to be expected. The markets were kind of going up on a pretty steady clip, kind of hot and heavy. I think it was all speculation on the second half rate cuts. Not a lot of fundamental improvement, just a lot of sentiment improvement. And now that sentiment improvement is starting to deflate itself a little bit. And people are starting to come to realization there's really no easy fixes. You're right, the consumer's under stress. We'll talk about that a little bit in just a second. And businesses are doing okay, but we're not— we're no longer seeing the torrent of beaten raises. So a lot— a little bit more sobering commentary from business leaders. And don't forget, we're on the doorstep, about 90 days away or so from an election. So I think there's a little bit of angst in the market. And then the final one I'll give you, we have this uncertainty as it relates to the election. And then we have people wondering, you know, is this soft landing that the market's going to be predicting? Will we land something a little bit more forcefully than soft given those jobs report that we've seen last week? So a lot to digest for investors given all of that and all the turmoil that we've had in markets, down 5%, down 8%, semis are down more than that. Be interested to see what small caps are down. Typical churning in the market. It's still August— is the final one that I was going to mention to people. And in August we have the back-to-school, everybody's trying to squeeze in their last vacation. And what that means is volumes are typically lower. So you tend to get a lot more outsized move and you can get a lot more churning. So a lot to digest.

Excellent. Thanks for that intro, Nolan, setting the groundwork for today's video. We're going to jump right into topic 1. So topic 1, an earnings review, and the consumer is starting to show weakness. So Nolan, a handful of companies have had good earnings reports this quarter. A couple that come to mind are Meta, Meta Platforms, the old Facebook, and Shopify, SHOP. Show those charts here. It does seem like more earnings reports have come in below expectations than above expectations this quarter. We're going to get into the consumer, Nolan, but what's your general impression of what you've seen in earnings so far?

Yeah, it's a much tougher crowd to please these days. Investors, just meeting expectations is no longer good enough. You need to beat and set the bar much higher. And companies don't have a lot of confidence in doing that right now. They— the word they use is the macro. And what they really mean is there's a lot of confusing signals. Their teleprompter is a little blurry right now. Investors did not like to hear that. So although a lot of companies did very well with expectations for this quarter, you know, stock prices based off of future expectations and companies set future expectations at a lot more sobering level, smart on their part. So when they go to future quarters, it'll be easier for them to meet demand. But basically they were talking investor expectations down and it didn't go over so well.

A little bit of a thread coming through some of your comments so far today, Nolan, is the big U-word, uncertainty. And we know markets don't like uncertainty. We have been tracking consumer weakness over the last 2 or 3 quarters. So this is not a new phenomenon this quarter. We've seen it coming through in some of the earnings reports and some of the earnings calls over the last few quarters, but it really is starting to hit a fever pitch now. And one of the reasons we see that, and one of the signals in terms of that, is travel. That's one of the last areas of consumer strength that's starting to lose steam and roll over as well. We'll throw up a couple of charts. Airbnb, Carnival Cruise and a little bit to a lesser extent Booking.com. These are companies that have been strong over the last few years but have had a tough couple of months. What are your overall thoughts about what's going on with the consumer, Noland? And does it worry you about the overall market?

Yeah, I think you could throw Expedia into that mix too. Had a pretty interesting report and you probably throw Visa in there with their commentary on spending. Yeah, I think this kind of makes sense. We've been talking about the strength in the consumer, particularly for experiences. I.e., travel. But you're right, we've gotten some cold water here the last few weeks. Disney and their parks division, same thing, tough crowd. And any place you see an earnings release that's tied to the consumer, you're seeing softness, if not outright weakness. Typically it's been a pause that refreshes for the US economy because we're powered by the consumer. But there is more uncertainty this time. Again, we mentioned the election, we mentioned inflation. You know, earlier this year we were talking inflation may have cooled down to the preferred level by the Fed at 2%, but it's on top of a 20% cumulative 5-year stack. And eventually those numbers are going to break the back of the consumer. They're already doing it. And the consumer, I mean, is fighting a heavyweight here. You have mortgage rates that are up. You have home insurance that's up, auto insurance that's up. I mean, no matter where you look, the consumer is paying more. For the same or less, and eventually something has to give. Travel finally gave this time. So maybe that was the straw. So I get it. It makes sense. The good news is the job market is still strong. People are still working. Wages are still pretty strong. And so that's kind of the last bastion of strength. But certainly there's been a big rethink. Uh, I think on the consumer's part, that's really smart to kind of stop and take stock of what's a necessity versus what's not. But in the marketplace, you know, stocks are kind of paying a price for it right now. So we'll have to see how this whole thing shakes out.

I agree, Nolan. And that does segue us well into topic 2 and talk a little bit about something that might help the consumer, which is topic 2: Who benefits from falling interest rates? So we do see a consensus starting to build that the Federal Reserve is getting ready to lower rates at some point in the near future. As we said, there were some complaints that it didn't happen at the last meeting, but let's look forward to the next meeting and see where that is going going forward. As I said earlier in in the video, the market's starting to change rates even if the Fed hasn't moved yet. Mortgage rates have already dropped significantly. They were close to 7.5% back in May of 2024. Now we're looking at low to mid-6% range for that 30-year mortgage. So a pretty big move already. And as we said, also seeing those moves in the 10-year Treasury. Uh, Nolan, as you consider some of the— that are coming to the economy as rates continue to fall, what areas of the market do you think are going to benefit from that?

Yeah, we're starting to see some movement. You talked about the consumer and interest rates. Let's put those together. We're starting to see, you know, you're right, mortgage rates are in the mid-sixes. From what the homebuilders tell us, that number, the magic number, is something that starts with a 5. So even if it's 5.99, I think the homebuilders will be very happy. And it's probably right. Consumers will feel better about signing their name to, to some rate with a 5 in front of it. So that's a magic number to look for. We're also starting to see some anecdotal evidence that some manufacturers are starting to price lower rates on their product. For example, car— if you look at cars, they're starting to be able to offer incentives with interest rates again to do that financing. So I think that's another interesting piece to, to take a look at. Finally, as it relates to the investment piece, I think that's where investors really have an opportunity to help themselves. But you have to be careful. You know, a couple summers ago, people were— couldn't believe it when they opened up their savings account and saw that they can earn, you know, something with 4% or something with a livable interest rate that they were going to be receiving on their savings. A lot of people locked in CDs at a 4% or 5%. Those numbers are starting to roll off now. And as interest rates have trended down, what investors will start to see if they look at their bank statement is that interest that they, that they've been receiving is going to start getting smaller and smaller, as they'll notice when they go in to renew CDs. One of the things, if interest rates are going to be going down, typically it's been an interest rate cycle. So the Fed hasn't done a one-and-done. So it's not like we expect one interest rate cut come September and then that's it. Usually there's a series of interest rate decreases to get in front of that. If we remember the old seesaw that we always like to show, interest rates down, fixed income securities up. I think we need to get ready for that. So one of the things that we're paying attention to these days is where can we get more interest on our cash reserves than we're going to be earning in the future in the bank. And interestingly, I know we were talking earlier today when we had our weekly investment meeting, we're starting to eye some securities with that 7 to 8% interest stream, which I think is going to start looking a lot more attractive in a 3% world than they did in a 5% world.

Let's drill a little bit more down on that then, Nolan. As you mentioned, rates are going lower. So people have had cash in the bank over the last couple of years doing really well with it, getting 4 or 5%, which they hadn't been able to do for many years before that. So understandable they'd want to hold cash when that opportunity was there. Certainly we expect those cash rates to fall as interest rates fall. Let's talk a little bit about what the strategy ought to be for investors if they're holding cash right now. What would your thoughts be in terms of what they should do to prepare for a lower rate environment?

There's going to be some minimal level of cash that people are going to feel good about holding just to sleep at night, or psychologically they'll feel good about not going below some Mendoza line. Figure out what that line is and everything else that's in excess cash, let's get ready to invest. Because if you're not planning on using it anytime in the foreseeable future, then that money is not short-term savings. It's actually a long-term investment vehicle that you're holding in a short-term vehicle. So let's make sure those things match. I actually like stepping out. You know, maybe it's a heavy lift to go from cash to stock, but to go from cash to an income security, I don't think that's going too far out there. And again, with some of these securities that are yielding, you know, 7% to 8% in a 4% to 5% world, they look okay. But my goodness, they're going to look tempting and very delicious in a 3% world. And so I expect prices on income securities over the next year or so to do very well in addition to getting income. And as you and I have been searching for, we're actually finding securities not only that have a good yield but also have an increasing yield. And I think investors should pay attention to that.

So there's a couple of pieces of that, Nolan. There's the fixed income. There are still bonds out there that are yielding you know, 5% or 6% or a little bit higher than that. So this is certainly something that you could look at. But also, as Nolan mentioned, what we're calling income securities, these are stocks whose companies are paying out most of their profits in the form of dividends to their shareholders. We're seeing quite a few of these. We've got a list of over 25 of these now that have an average yield of in the neighborhood of 7%. So certainly something that you might want to take a look at as you look to find a home for cash as we go to a lower rate environment. We'd be happy to talk with you in more detail. Get in touch with us using the details on the screen here. That being said, Nolan, any closing thoughts as we end the video this week?

Yes. The first preseason games we had over the weekend. So we're getting ready to start football season, which tells us it's the fall. The fall is upon us. School season is upon us. The summer is winding down. And so for investors, before you know it, we'll be in the fourth quarter. So we start thinking about year-end now. It's time to take a look at capital, capital gain, capital loss harvesting, taking a stock of how you're positioning— positioned as we head into the end of the year. And I'll just remind investors, this is a big election that's happening coming up in the next 90 days. We do expect some volatility over the next 90 days as the candidates make their pitch as to why we should select them. And what I'm hoping for— again, this is an economy we think over time is going to do well. We think the market's going to do well. And certainly individual securities that we're selecting are going to do well. But I think you're going to hear a lot made of the economy weakening. Each candidate will put forward their strategy for making us all feel better on Main Street. So probably be talking about our near-term prospects. So we'll be more likely to vote for their, for their change. And that will move markets some. But just, just be patient. We'll work our way through it. And we're looking forward— we're looking forward to finding opportunities no matter what shows up here in the next couple of months.

Couldn't agree more, Nolan. We'll ask you to like and share the video if you've made it this far and subscribe and hit the bell for notifications. That way, you know, the next time these videos are out, we're out every other week with these. Nolan, thank you for being with us. We'll thank the viewers for being with us again. And we'll see you again next time.