Financial Foundations

SEASON: 2
EPISODE: 9

Navigating Q2’s Economic Outlook: Consumer Spending, Corporate Profits & Inflation Insights

  • Home
  • Podcasts
  • Navigating Q2’s Economic Outlook: Consumer Spending, Corporate Profits & Inflation Insights
TRANSCRIPT:
So I think you're starting to see a shift in people are allocating their money toward more essential things that are rising in costs and they're watching what they're spending on. Welcome to the Financial Foundations podcast, your gateway to the fascinating realm of finance brought to you by Base Wealth Management. In this show, we delve deep into the world of money guided by seasoned experts who will unravel the complexities of finance and provide you with invaluable insights and practical advice. Here are your hosts, Dustin Taylor and Alex Wolfe. Welcome back to Financial Foundations brought to you by Base Wealth Management, where we are the foundation to your financial plan. I'm your host, Dustin Taylor. I'm your co-host, Alex Wolfe, certified financial planner. And today we thought it would be a good idea to revisit a topic that we made a recent video on and that is the state of the economy as of quarter two. As we head into the election year, many voters are going to be looking to the state of the economy in helping them determine who they're going to put their ballot in for. So we're going to discuss what we look at when making changes to portfolios and financial plans to help clients stay ahead of the curve. So Alex, how have corporate profit margins fared during this inflationary period? To be expected, corporate profit margins have started to dip a little bit as inflation has started to hit some of these companies and the products that they produce. And the hardest hit ones are like dollar general, like these value type retailers where their profit margins were already really thin. You're seeing that in like Walmart and even grocers where they just didn't have a big margin to begin with, but revenues, which is interesting. So even though their profits are shrinking slightly, they're still selling a lot of goods. And we'll see that in a little bit when we talk about the consumer and spending and things like that. So it's kind of foreshadowing what's to come, but you're still seeing very strong earnings for publicly traded companies and they're being rewarded for these earnings with a pretty nice little bump in their stock price when they report, even more so than historically speaking. Do you think this will continue or will there be a breaking point? That's a question that I've been kind of bouncing back and forth when thinking about what is that breaking point or is there one for consumers? And I think that there is. When you think about how price sensitive we are these days when shopping, I think we're starting to see people pull back on where they're spending their money, especially on essential items. Groceries are very expensive and people are pulling back on the more luxury good items and spending on kind of non-essential things. When you look at corporate earnings for like luxury companies they are down. So I think you're starting to see a shift in people are allocating their money toward more essential things that are rising in cost and they're watching what they're spending on. When you think about how the S&P 500 is so concentrated at the top, how does this affect how you construct financial plans or portfolios? Yeah, so we've seen a big concentration at the top of the S&P 500. So as you know the S&P 500 is 500 U.S. companies and they're not all equally weighted. So you see at the top as these companies grow the largest ones in the S&P 500 make up a significant portion of that index now because of the growth that those companies have seen especially in the last 16-18 months and that concentration comes into how we think about our portfolio construction, because when you're trying to pull in together different mutual funds or ETFs, there's going to be some natural overlap if you're investing in large cap ETFs. There's so many of these companies that are owned in the underlying ETF that you want to make sure that you have a software like we do that shows you what the comparative holdings are and how overlapping they may be. What are the Magnificent Seven stocks right now? So the Magnificent Seven has really gotten this name recognition, and those are going to be Google, Amazon, Apple, Meta, formerly Facebook, Microsoft, Nvidia, and Tesla. And we've started to see this grouping where some of them have started to perform better than others in the Magnificent Seven. So, so far in 2024, was bringing down.

Now in the Magnificent Seven is like Tesla and Apple, they've not done well this year. But on the flip side, NVIDIA and Microsoft and Meta have done extremely well. So you're starting to see this gap in between the top performers and the laggers. When looking at the growth of the economy, what do economists use to measure this? So as some of our listeners are probably familiar with, they use a statistic called gross domestic product. And it really measures the spending that goes into boosting the economy from imports and exports and all this stuff. And they want to see like a positive measure from quarter to quarter. And when you see a recession, it's two back to back quarters of negative growth. So they still may be positive, but it may just not be growing. But we're still seeing a pretty good growth in the US economy from quarter to quarter. We are not in a recession, even though I don't predict the future, or likelihood or probability of a recession right now is very low by all statistical measures. So what's keeping the economy growing is consumer spending. And right now it's made up of almost 68% of GDP growth is consumers. And then the second biggest category is government spending. Not that surprising. Ever since COVID, the government has really been on the gas pedal trying to keep us out of a recession. And so far they've done that. And kind of back on the table is that soft landing, especially as inflation is still not solved. It has come down, but we seem to have kind of reached this point where it hasn't gotten any lower. Certainly not back down to the 2% that the Federal Reserve is hoping for. We're still above that, closer to 3%. So the government is trying to prevent a recession. And hopefully we can get to that kind of soft landing where if there is a recession, it's really shallow and doesn't last very long. So we talked about in a previous episode the TCGA Act possibly sunsetting in a little while. And I know it's still a little ways off, but that's extra money in people's pockets now that if that sunsets could affect the economy, right? And then on the flip side of it, if Congress does act and they decide to keep all or some of it, then that just adds to the government deficit. So how does that affect things here? It's an interesting point and question that you're making. And it definitely will affect consumers when you think about the tax cuts part of what you're talking about. We've been fortunate where we've had a little extra cash in our pockets from experiencing a slightly lower tax cut in our own income. So that's benefited. We've had a little extra spending money. And as that sunsets, if they don't act, people are gonna have a little bit more owed maybe a little bit more withheld from their pay, hopefully, so that they don't have any huge surprises when they file their taxes. So that will definitely put a little bit of a strain on consumers and ultimately trickle down to the economy. It's less money in the economy. And then the second part of that is if they extend that, well, then what happens? Well, then they have less revenue or taxes to help try to cut that deficit, which is just another problem. And it just seems that no matter who is in office, that hand just keeps getting kicked down the road because any political candidate that comes into office or is running or campaigning and talking about raising taxes, that's just not going to go over well, because even myself, who I'm totally fine with paying my fair share of taxes, is not going to think very highly of, oh, let's increase middle America's tax rates. That's not going to go well. 

if you talk about what Biden is right now in increasing like the super wealthy's tax rates, well, they're not going to fund your campaign. They don't want to be taxed. Nobody wants to pay more in taxes. So it's kind of like a lose-lose proposition. And as I mentioned, kicking that can down the road. So I'm talking about consumer spending and taxes, then we can talk about debt. How is household debt affecting the economy right now? When we were coming out of COVID, household balance sheets, so like their assets to debt ratio was really good. Like they had more assets, low debt, but now we're starting to see people taking on more debt. You're starting to see some delinquencies in loan payments and car payments tick up, which is, it happens historically. But when that does reach a point, you're starting to think like, oh, people are not in as good of a position as they were previously, which is to be expected with the cost of living. And we've been talking about inflation for well over a year, and that's had a big impact on households. So they're having to take on more debt. And when they do, those debt instruments or loans are at a higher interest rate than they were two years ago. So their debt costs them more, their payments are higher on those loans. So we're starting to see people tap into savings and savings is being depleted and people are taking on loans. So as a financial planner, how does that affect your plans? When thinking about how people are not saving as much as they should be, or as they once were, you're having to have a kind of a coaching conversation with them on if you want to accomplish these goals in your plan, these are the potential changes you need, or in some cases like you will have to make to accomplish retiring at X age or lower living ex-wifestyle or buying that extra property or car. Those are the kinds of things that we're talking about. It's like, are you in a financial position to be able to accomplish that? And consumer sentiment and confidence will play a big role in the election. What are you seeing right now on that? So consumer confidence is actually gaining some traction. We saw it hit a really low point, especially last summer when inflation was well over 9%, even 11% in some areas of the country. That's when things really kind of were not looking good on the consumer side. But lately, especially coming out of December of this last year, people's confidence is starting to tick up, which is probably a good thing if you're a Biden supporter. As confidence ticks up, they're more likely to support the incumbent as they think that the economy is headed in a good direction. How is unemployment or wages doing right now?

So again, talking about coming out of COVID, unemployment was historically low. We talk about the supply of labor, and we did see a lot of people exit the workforce. So they were not counted in the unemployment rate because they're not seeking employment. But we have started to see unemployment tick up, but we are still well below historical averages. So people who are wanting work are working, which is a good thing. And we're seeing some interesting things when looking at some statistics about labor supply. And here in the U.S., it should not be surprising to people, but some people may be caught off guard by this, but we're very reliant on non-U.S. born labor, especially for the blue-collar work. So it is important that our elected officials work on our immigration system to make sure that it is healthy, it's safe. But we are reliant on those workers for a lot of jobs in the U.S. economy. But we're still seeing strong labor force participation amongst U.S.-born workers and non-U.S.-born workers. So that's a good thing. JS So the unemployment rate is not a concern at the moment? It is not. Even though it started to tick up, it's still, as I mentioned, historically low, being under 4%. Kind of 4% is somewhere where we look to stay below. So if we start to see it go above 4% is when you could see some recession fears start to rise. So those are consumer and economic data points. So now let's transition into how things are One thing that many investors get wrong is how to diversify into multiple asset classes. How do you handle this? We've got this really interesting, I don't know like a heat map where it shows the different returns for various asset classes by year. And one thing that you'll quickly notice when looking at the chart is how rarely is the same asset class the best every year. So think about large cap stocks, small cap, fixed income, cash, real estate, commodities, emerging markets. The map shows that from year to year, there can be a big difference in what is the best performer and what is the worst. But what we always show people is the importance of a properly diversified portfolio where you're investing a little bit into many different asset classes. And you'll put more money into one particular asset class over another. You don't just evenly weight them all. But one thing that you'll see is that consistently a well-balanced portfolio will outperform just one asset class over the course of several years. So like in 2022, large cap stocks were one of the worst, but in 2023 and so far in 2024, large cap is the best performer. So it's important that you have money invested into a variety of different things that will perform better at different periods of the economic cycle. So there seems to be consistent news about the market hitting highs and records being set. Does this mean anything? Not really, but it does to your average investor. They are very timid or hesitant to invest at these all-time highs. They're like, well, if we're hitting all-time highs, like I want to wait for a pullback or for it to come down. But as we consistently see, the stock market is hitting highs over 6% of the year.

So on a given year, over 6% of the time, the market is hitting a high, which is actually pretty surprising. And then another surprising statistics off of that is how often that new high sets the new floor almost 30% of the time. So it shows us that regardless of if the market's at a high, it's still a good time to be investing. And that 30% of that time, that's the new floor. It doesn't ever come back down below that hardly ever. So have no fear. It's still a good time, even when you hear a lot of news about the market's hitting highs. So getting back to the economy, everyone's concerned with interest rates and whether the Fed will cut them or not. What do you think? I love this question actually, because I talk to clients about this regularly because this has been an ongoing conversation for some time now, is when will the Fed be in a position to be able to start cutting rates?

And for the longest time we thought it was going to be this summer and that's kind of falling out of flavor because the inflation reports as of late just don't support that notion that the Fed's going to be able to start cutting rates. And now some people are even predicting that they won't be able to cut rates at all in 2024. And that could definitely be true as well, but I think that we will still see at least one rate cut in 2024. That's kind of my prediction. And what will happen in the fixed income and bond market is the short-term rates that everyone has probably been taking advantage of hopefully, like on cash and money markets and short-term CDs and treasuries being over 5%, those are going to be moving down the quickest. So the farther out you go, the less sensitive they are to rate changes, but the closer the term, the more rate sensitive they are. So if there are rate cuts, you'll start to see those short-term fixed income investments really move. Bob, but to answer your question, which I don't know if I did, is maybe they'll be able to cut rates once this year, but really it all depends on how inflation is. And it's like a dead horse, we just keep beating over and over, it's inflation, inflation, inflation. And the consumers, our households here in the U.S. have just been so resilient, maybe to a fault, with our spending has really held the economy up. All right, so that is the latest on U.S. economy and how base wealth management positions clients to stay ahead. If you'd like any more information, you can definitely visit the website atbasewealthmanagement.com. There are loads of resources there, including more podcast episodes, videos, and articles. Be sure to also subscribe and download the podcast on your favorite podcast listening app and be sure to submit any questions that you'd like us to go over or answer on the podcast to us at question@ basewealthmanagement.com. I'm Dustin Taylor. I'm Alex Wolff. And happy listening. We hope the expertise shared by our hosts, Dustin Taylor and Alex Wolff, has left you feeling empowered and informed. If you're eager for more financial wisdom, don't forget to subscribe, rate, and share the show with your friends, family, and colleagues. Until next time, stay sharp in the world of finance.

Schedule a Consultation

"*" indicates required fields

This field is for validation purposes and should be left unchanged.

SUBSCRIBE TO OUR YOUTUBE CHANNEL!

Click here to go to our YouTube channel and subscribe for weekly financial updates and more! We’d love your help to in getting to 500 subscribers!

Register for our Open House event!

2022 Tax Document Information

As a Base Wealth Management client, you should receive your paper tax documents via mail in the coming weeks. Or, if you previously had an online account with Pershing’s NetX360, you should be able to access your 2022 tax documents through that portal. 

If not, or if you experience any issues, please reach out to Tim O’Brien (tim.obrien@intervestintl.com).

Get a FREE Solo 401(K) Guide

Simply submit your name and email to receive a PDF straight to your inbox.

"*" indicates required fields

Name*
This field is for validation purposes and should be left unchanged.
 *We protect your data and HATE spam.
 

Get a FREE Roth 457 Guide!

Simply submit your name and email to receive a PDF straight to your inbox.

"*" indicates required fields

Name*
This field is for validation purposes and should be left unchanged.
 *We protect your data and HATE spam.
 

Get a FREE Roth 401(K) Guide

Simply submit your name and email to receive a PDF straight to your inbox.

"*" indicates required fields

Name*
This field is for validation purposes and should be left unchanged.
 *We protect your data and HATE spam.
 

Get a FREE Solo 401(K) 2-Pager for FireFighters

Simply submit your name and email to receive a PDF straight to your inbox.

"*" indicates required fields

Name*
This field is for validation purposes and should be left unchanged.
 *We protect your data and HATE spam.
 

Get a FREE copy of Divorce the IRS

If you would like to request a physical copy of Divorce the IRS, please fill out the form below.

"*" indicates required fields

Name*
Address*
This field is for validation purposes and should be left unchanged.
 *This book is most suitable for households with $250K or more in investable assets.
 

OOPS!

You’ve stumbled across an element that isn’t quite ready for the web yet. We’re working on a lot of new features so stay tuned.

-The Base Wealth Team

Choose your advisor

Dan DiLascia

Sean Koscho

Kyle
Howell

Josh
Pisa