A check on the consumer

This week May retail sales disappointed expectations, coming in at 0.1% for the month versus expectations of 0.2%. When you strip out autos, retail sales actually declined by 0.2% for the month, also below expectations. Consumer confidence remains a pivotal indicator of economic health, representing about 70% of the economy. Looking back at recent data, consumer confidence levels remain steady but low, with the expectations part of the survey indicating recession-type levels. There have also been several recent notable consumer surveys, some of which highlight the disconnect the consumer feels with the overall state of the economy. Recent surveys suggest that many consumers feel like the economy is in a recession and that the stock market is down on the year, both of which are not the case.

• Surveys, like political polls, are notoriously error-prone
• However, it is striking that consumer sentiment seems to be stuck at relatively low levels despite the economy continuing to do relatively well and the stock market at all-time highs
• Part of this has to do with the recently high inflationary environment and elevated costs for consumers
• Eric Basmajian of EPB research recently wrote a report that attempts to explain this divergence
• Eric isolated personal income in the private sector, stripping out government transfers
• He found that since Covid began, if you strip out government support, personal income has lagged behind its very long-term growth trend
• The government stimulus in 2020 and 2021 plugged the gap but has run out since
• Consumers are stuck with elevated prices due to inflation without the commensurate gains in their income
• He also points to a bad demographics picture in the country as another source of concern

Market diverges and an update on NVDA

We have noted many times that the current market run has been very narrow, i.e. led by very few tech stocks. When looking at the market over the last month, that trend is even clearer. Since mid-May, the tech-heavy NASDAQ is up over 7%, the S&P 500 (which has a large tech exposure) is up 3.5%, and the Dow Jones Industrial Average (less tech) is down 3%, while the small-cap Russell 2000 is down 3%. The divergence is significant, further highlighted by the fact that NVDA, for a brief while, became the biggest company in the US this week, surpassing MSFT and APPL. While NVDA’s fundamentals have been very strong, if you look at recent stock performance it seemed like the valuation was getting a bit stretched.

• Before pulling back, NVDA was up over 50% in the last 3 months and 200% in the last 12 months
• While Nvidia’s sales have been growing at a significantly fast pace, the valuation began to get untethered from the fundamentals recently
• We have discussed the danger of a market led by a handful of companies before
• How the market continues from here depends on whether or not the rest of the companies begin to participate in the rally or if the leaders revert to the mean
• So far, we have not seen evidence of broad market participation, so if NVDA or any of the other leaders experience a pullback, this could mean a pullback for the overall market

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