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Three reasons why US consumers are poised to fast track the economy
By Cara Esser, CFA
Director of Portfolio Management and Research
The economic and market downturn that struck in March 2020 wasn’t the result of financial mismanagement, commodity shortage or a geo-political event. If it had been, investors would have had some past examples to help formulate a response. The unprecedented nature of the pandemic thrust investors into unexplored territory. In this report, I’ll detail three primary reasons why the US consumer is primed to fuel a significant economic expansion, and why now may be active managers’ time to shine.
This time really is different
Many of us still bear the scars of the 2008-2012 global financial crises. While it’s understandable for investors to fear a repeat in the wake of 2020, there is little resemblance between the two.
The COVID-related S&P 500 drawdown looks far less long and deep than the 2008 global financial crisis.
Figure 1: S&P 500 Index Dropdown
Time period: 4.1.2006 - 3.31.2021
Source: Mesirow, Morningstar. Data as of 3.31.2021. Past performance not indicative of future results.
Money market assets have soared in the pandemic—meaningfully more than during the global financial crises. That suggests investors have more cash in reserve right now
FIGURE 2: Money market assets have soared in the pandemic
Source: John Hancock Investment Management. U.S. Data are as of March 31, 2021.
The Federal Reserve’s response to the COVID crisis has been far more dovish than to the 2008-2012 recession.
Figure 3: Federal funds rate expectations
FOMC and market expectations for the federal funds rate
Source: Bloomberg, FactSet, Federal Reserve, JP Morgan Asset Management. Market expectations are the federal funds rates priced into the fed futures market as of the following date of the December 2020 FOMC meeting and are through December 2023. * Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Guide to the Markets – U.S. Data are as of December 31, 2020.
Recovery from 2008 was slow
- It took six years for unemployment to reach 5%, what the Federal Reserve believed to be the “natural” rate of unemployment.
- GDP growth dropped 2% in 2008 and another 2.4% in 2009.
- In the post-crisis years, GDP limped along, ranging between 1.5% and 3% per year.
Recovery from 2020 has been fast
- Unemployment peaked at nearly 15% in Spring 2020. Less than a year later, it had dropped to 6%.
- The Federal Reserve estimates unemployment will dip below 5% in 2021.
- GDP growth dropped 3.5% in 2020. The Federal Reserve estimates GDP growth will top 6% for 2021.
3 reasons why US consumers are poised to drive rapid economic growth
Consumer spending makes up about 70% of US GDP. When consumers spend, the effect on the US economy can be tremendous. All the US consumer needs to fuel a rapid economic expansion are three things:
- Money in the bank
- A strong balance sheet
- Pent up demand
Fortunately, all three are in place right now.
Money in the bank
Figure 4: US disposable income vs consumer spending
Source: BlackRock Investment Institute. BlackRock is not affiliated with any third parties referenced herein. U.S. data are as of December 31, 2020.
A strong balance sheet
FIGURE 5: Household debt service ratio
Debt payments as % of disposable personal income, SA
Source: FactSet, FRB, JP Morgan Asset Management, BEA. Data include households and nonprofit organizations. SA – seasonally adjusted. * Revolving includes credit cards. Values may not sum up to 100% due to rounding. **4Q20 figures for debt service ratio are JP Morgan Asset Management estimates. Guide to the Markets – U.S. Data are as of December 31, 2020. Past performance not indicative of future results.
Pent up demand
- Movie goers are back in theaters. “Godzilla vs Kong” earned nearly $50 million in the first five days of its theatrical release, on par with the opening weekend take of 2019’s “Godzilla” theatrical release. This is despite limited capacity in theaters for many major markets.
- According to a survey conducted by the New York Times, about 35% of respondents plan to spend or travel more in the next year than they do in a typical year. 28% planned to spend more than usual at restaurants.
- Americans are ready to travel. Hotel bookings are on the rise and airlines are no longer blocking middle seats.
Source: US Census Bureau; Wall Street Journal; New York Times. Past performance not indicative of future results.
Active managers once again have a chance to shine
If a consumer spending-fueled economic resurgence happens, active managers have a chance to shine. That’s because stock market gains during the last few years have tended to be concentrated in domestic, large cap, high growth stocks, particularly in the technology sector. To uncover growth potential, investors may have to look elsewhere.
After favoring large cap domestic growth—particularly tech—for several years, investors may now be looking for lower valuations. The NASDAQ Composite gained just 3% for the first quarter versus 6% for the Russell 1000 Index.
Figure 6: Performance of Russell Indexes
Source: Mesirow, Morningstar; Data as of 3.31.21. Past performance not indicative of future results.
The strong returns of the S&P 500 Index are largely due to the meteoric rise of a handful of large technology stocks. The spread in valuations across all stocks in the S&P 500 is near all time highs.
Figure 7: S&P 500 valuation dispersion
Valuation dispersion between the 20th and 80th percentile of S&P 500 stocks
Source: Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Guide to the Markets – U.S. Data are as of December 31, 2020. Past performance not indicative of future results.
A similar pattern of extreme divergence in performance and valuations exists for domestic stocks vs foreign stocks. Both the MSCI EAFE and MSCI Emerging Markets Indexes have trailed the S&P 500 Index, leading to big valuation differences.
Figure 8: PE ratio
Source: Mesirow, Morningstar; Data as of 3/31/2021.
Everything old is new again
The low interest rate/large-cap US growth-biased environment has been in place for so long, it’s difficult to recall what “normal” was like prior to the 2008-2012 crisis. There was a time when 10-year Treasuries yielded more than 3% and value stocks outperformed growth. Investors are now being reminded that those conditions are, in fact, normal. For those who recognize that such an environment favors an actively managed, value-oriented approach, the next few years offer the opportunity for above market returns.
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This presentation is intended for educational use as of 4.28.2021 and opinions expressed herein are not intended to constitute an offer to sell or a solicitation of an offer to buy an interest in any Mesirow investment vehicle.
Standard & Poor's 500 – Reflects the risk and return characteristics of the broader large cap universe of the U.S. equity market. The index selects its companies based upon their market size, liquidity and sector.
Bloomberg Barclay’s Aggregate Bond Index – Broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.
MSCI ACWI ex US – Index comprising of non-U.S. stocks from 23 developed markets and 26 emerging markets.
MSCI EAFE – The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. As of December 2010 the MSCI EAFE Index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
MSCI Emerging Markets – The MSCI Emerging Markets (EM) IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 2005, the MSCI Emerging Markets Index consisted of the following 26 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela
Russell 1000® Growth Index – Measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to book ratios and higher forecasted growth values.
Russell 1000® Index – Measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the Russell 3000 Index.
Russell 1000® Value Index – Measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
Russell 2000® Growth Index – Measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000® Index – Measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
Russell 2000® Value Index – Measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
MBS – The Bloomberg Barclays US Mortgage Backed Securities Index is an unmanaged index that measures the performance of investment grade fixed-rate mortgage backed pass-through securities of GNMA, FNMA and FHLMC.
ABS – The JP Morgan ABS Index is a method of measuring the value of the ABS market. It is a weighted average value of a portfolio of the Asset backed securities.
Corporates – The Bloomberg Barclays US Corporate Investment Grade Index is an unmanaged index consisting of publicly issued US Corporate and specified foreign debentures and secured notes that are rated investment grade (Baa3/BBB or higher) by at least two ratings agencies, have at least one year to final maturity and have at least $250 million par amount outstanding. To qualify, bonds must be SEC-registered.
Municipals – The Bloomberg Barclays Municipal Index: consists of a broad selection of investment- grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market.
High Yield – The Bloomberg Barclays US High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
TIPS – The Bloomberg Barclays US TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury.
U.S. Floating rate index – The S&P/LSTA U.S. Leveraged Loan 100 Index is designed to reflect the performance of the largest facilities in the leveraged loan market.
Convertibles – U.S. Convertibles Composite measures the performance of the US convertibles market.
2,5,10, 30 US Treasury – these are just treasury bonds, no index.
Unless otherwise indicated, all illustrations are shown in U.S. dollars. | Past performance is no guarantee of comparable future results. | Diversification does not guarantee investment returns and does not eliminate the risk of loss. | Indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index.
The Barclays Capital U.S. Aggregate Index represents securities that are SEC registered, taxable and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis.
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