Frugal Fatigued
Weekly Market Commentary 1-17-12
Tim Phillips, CEO – Phillips and Company
For the first time since WWII, the US Debt has increased above 100% of GDP. While this is a troubling number, it's not as relevant in the short run as another number, 71.06%, the percentage of GDP which is currently made up of consumer spending.
The question for the long term is: Can the consumer keep up the pace?
The United States’ Real GDP is expected to grow at an annualized rate of 2.3% in 2012 and remain below its long term historical growth rate for the next several years. On the other hand, consumer spending is expected to grow at an annualized rate of 3.4% and if this is true, then that number, 71.06%, will continue to increase. However, in the long term this scenario is most likely a resounding no. In my opinion, this is clearly not a sustainable path and in a future blog I can discuss all the prevailing factors that lead me to this conclusion. I have a feeling many of you would agree.
The question for the short term is: Can the consumer maintain a reasonable pace in 2012?
US equity markets are near short term highs. The markets will need a strong consumer to continue to move it higher. Let’s sift through some recent data:
We have seen a bounce in real disposable personal income and at the same time people are beginning to spend down their savings.
Revolving credit increased at an annual rate of 8.5% and appears to have bottomed out. Next, we look beyond all the income and purchasing inputs and look to see if the consumer is willing to spend.
Beyond the sharp increase in consumer confidence, it appears consumers are becoming “frugal fatigued” and perhaps releasing “pent-up” demands from the last couple of years. In the near term, there looks to be clear signs of a willing and able consumer. If we avoid massive headline risks that would cause the consumer to increase their savings rate, then my opinion is spending increases in the near term look likely. Unfortunately, I think the increases in the 3+% range over the long run is not likely.
Earnings season is just getting started and as you can see in the graph below expectations have been revised down across the board. With lowered expectations, a short term bias to the upside and attractive long term valuations (bottom chart), we might just see some follow on action.
Certainly, any significant pull backs from profit taking would be nice entry points to average in new money from the sideline. For those already allocated, it's a matter of time and patience.
If you have questions or comments please let us know as we always appreciate all your feedback. You can get in touch with us via Twitter, Facebook, or you can Email me directly.
Tim Phillips, CEO – Phillips & Company
Research Provided by:
Adam Gulledge, Associate – Phillips & Company
Hat Tip: to Bespoke Investment Group for the earning revisions table and JP Morgan for the P/E ratio graph.