Pre-Market Stocks: Rich People Worry About Spending. It is bad news

What’s happening: Goldman Sachs forecasts the August Conference Board Consumer Confidence Index, due out today, to rise 1.8 points to 97.5. This comes after three consecutive months of decline.

Meanwhile, the final results of the University of Michigan Consumer Sentiment Survey this month showed a significant increase in forecasts for the coming year.

This may sound like great news. But a closer look at the numbers reveals a more troubling picture. The problem is that wealthy Americans aren’t as excited, which could mean markets and the economy as a whole will be in even greater danger.

“High-income consumers, who bear a disproportionate share of spending, have recorded significant declines in both their current personal finances and purchase conditions for durable goods,” the Michigan researchers wrote.

Why it matters: Spending by the top 20% of workers accounted for nearly 40% of total U.S. consumer spending in 2020, according to the Bureau of Labor Statistics. And consumer spending is the most important driver of US economic growth.

Of course, there can be a difference between what people say about their feelings and what they actually do. But in this case, we’re starting to see some real impact.

Analysts at the Bank of America Institute found that total household credit card spending (excluding groceries, gas, and clothing) for consumers making more than $125,000 declined for three consecutive months, while remaining fairly stable for lower-income consumers.
There are other signs that the rich are trading down. walmart (TDC) CFO John David Rainey told CNBC Earlier this month, shoppers are buying fewer high-priced discretionary items like clothing because inflation is forcing them to shell out for essentials. He also, interestingly, noted that about three-quarters of Walmart’s second-quarter food market share growth came from shoppers with annual household incomes of $100,000 or more.
High-income patrons are also reported to be trading in more expensive restaurants for budget-friendly standards such as Applebee’s and IHOP.
Sales in two chains, both owned Dine Brands (DIN), rose about 6-8% among households making more than $75,000 a year in the second quarter, according to Dine CEO John Peyton. The jump “tells us that guests who frequently dine at more expensive restaurants are finding Applebee’s and IHOP because of their well-known price point,” Peyton said in an analyst call earlier this month.

This may seem positive for companies that can benefit from such changes in habits. The problem is that lower-income consumer sentiment typically lags higher-income consumer sentiment, meaning a more severe slowdown could occur.

“In an economy that is 60% dependent on services, you can see how easily this view of spending in a small group of income earners has a bigger impact on a large group of Americans,” Marvin Lo, State Street senior global macro strategist, told me. “That’s the definition of seepage down.”

Investor’s perspective: This doesn’t bode well for stocks of companies that sell products that people want but don’t necessarily need. Names like Amazon (AMZN), Home Depot (HD) as well as LVMX (LVMHF) helped lift the sector off the mid-June lows, climbing nearly 30% through mid-August, before collapsing again. The sector fell sharply after Federal Reserve Chairman Jerome Powell pointed out that there are “sore problems” ahead as the US central bank continues its tightening policy.

“The increase we have seen over the past six weeks didn’t make much sense to me,” Loh said.

Thank you (pumpkin) latte

It’s 88 degrees in New York and California is battling a devastating drought. But how Starbucks (SBUX) concerned, it’s time to break out of chunky sweaters. Pumpkin spiced latte is back in stores.
While PSL may be weather resistant, it is not immune to inflation. The fall favorite, according to my CNN Business colleague Jordan Walinsky, is getting more expensive: a large-sized hot drink costs shoppers between $5.45 and $5.95 depending on location — about 4% more than in 2021.
Starbucks is hardly alone. Earlier this year, Burger King removed the Whopper from its budget menu and reduced the number of nuggets from 10 to eight. Chipotle (cmg) has raised prices at least three times since August 2020. Dunkin’, Taco Bell, The Cheesecake Factory and McDonald’s (MKD) also raised prices to account for rising inflation. Last year, the cost of food rose by about 11%. This is the highest figure in over 40 years.

So far, consumers have continued to absorb the high prices of discretionary goods, but as inflation and interest rates continue to rise, some are wondering if this fall and the holiday season will be a turning point.

“We are seeing negative discretionary cash flow this year for the first time since the financial crisis of 2008-2009,” Jason English, consumer goods analyst at Goldman Sachs, said last week. Goldman estimates that discretionary cash available for the holiday season will fall 1.2% this year.

Starbucks is definitely watching. PSL has historically been a huge seasonal Online Sales Manager. In 2021, Starbucks saw a marked increase in sales the week they started selling PSL. The 10% increase in weekly sales was the biggest jump in weekly sales since spring.

And while the PSL season may be a bit lackluster this year, Goldman expects spending to pick up in the new year. They forecast consumer cash flow to grow by 6% in the second half of 2023. This is a total profit of almost 600 billion dollars, or about 110 billion lattes.

This Fed official is pleased with the fall in stocks

Markets took a beating last week — and that’s not necessarily a bad thing, according to one Fed official.

The drop following Friday’s Jackson Hole speech by Fed Chairman Jerome Powell shows that investors are finally serious about the Fed’s commitment to lower inflation, Minneapolis Fed President Neil Kashkari told the New York Times. Bloomberg Odd Lots Podcast on Monday.

“I was really happy to see how Chairman Powell’s speech at Jacksonhall was received,” Kashkari said.

“I definitely wasn’t thrilled about the stock market going up after our last meeting of the Federal Open Market Committee,” he added. “Because I know how committed we all are to lowering inflation. And somehow I think the markets got it wrong.”

Markets fell significantly after Powell’s speech, in which he said fighting inflation would bring “some pain to households and businesses.”

The S&P 500 closed 3.4% lower on Friday, its worst day since mid-June. On Monday, he retreated again.

Next

▸ At 10:00 am ET, the Conference board is to release US consumer confidence data for August.

▸ JOLTS jobs for July are posted at 10:00 AM ET.

▸ Income from Baidu (BIDU), Best Buy (BBY)hp, Hewlett Packard Enterprise (HPE), Chewing (CHWY)PVC and CrowdStrike

On Tuesday: private sector employment US ADP; China’s official PMI; India’s GDP; earnings from Evergrande, Meitu, Brown-Forman and Designer Brands

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