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Western consumer spending looks vulnerable


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Consumer confidence in the US, eurozone and UK point to bleak days ahead

Consumer confidence readings in the US, Eurozone and UK have been at all-time lows (see charts below) and predict weakness in spending. The question is not whether consumer spending will collapse soon, but in light of these bleak readings, how could it no?

As I argued recently, consumer spending tends to be resilient… until it can no longer be. Economic trends like spending are often non-linear – they reach tipping points where what was changing gradually accelerates dramatically.

In his book A turning pointMalcolm Gladwell provides several examples to illustrate this phenomenon. He gives three examples of tipping pointsoutside the realm of economics, it’s the syphilis epidemic in Baltimore, the revival of Hush Puppies, and school shootings.

In terms of consumer spending, a sudden deterioration can occur when corporate profits begin to fall, companies are forced to start laying off workers, credit cards are maxed out, etc. As a result of these events, fear begins to spread, causing more widespread spending cuts, further layoffs, and further downward spiral. spiral

What ultimately matters to investors is how financial markets will behave in the face of changing economic indicators.

Financial markets do not seem to expect a sharp drop in consumer spending. Bond yields are only marginally off their highs, and the stock market’s decline this year has been modest compared to what would normally be expected from or before a recession associated with a sharp decline in consumer spending.

Since financial markets tend to be very efficient at discounting information such as that included in consumer confidence indicators, I have to wonder if I or the markets are missing something.

Appendix A: 1972-4

The University of Michigan Consumer Sentiment Index fell significantly throughout 1972 and into early 1973, but the stock market did not fall sharply until the second and third quarters of 1974.

Exhibit B: 2007-8

The University of Michigan’s consumer sentiment index fell significantly during 2007 and the first half of 2008, but the stock market fell sharply only in the last quarter of 2008.

There are several counterexamples, but my point was to show that markets are sometimes inefficient, but not always. It’s possible that somehow the extremely dire consumer confidence readings in the US, Eurozone and UK are not a sign of weakness in consumer spending and equity markets. I just think there’s a significant risk that it isn’t.

Chart 1: US Consumer Sentiment Index

Source: University of Michigan

Chart 2: Consumer confidence in the Eurozone

Source: European Commission

Chart 3: UK consumer confidence

Source: GfK, Refinitiv, FT

The opinions expressed in this post are those of Peter Alston at the time of writing and are subject to change without notice. They do not constitute investment advice and, although every reasonable effort has been made to ensure the accuracy of the information contained in this communication, the reliability, completeness and accuracy of the content cannot be guaranteed. This communication contains information for professional use only and should not be used by retail investors as the sole basis for investment.

© Chimp Investor Ltd

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