Consumer Better than Feared? Earnings Revisions Bottoming
Comment of the Day

April 27 2020

Commentary by Eoin Treacy

Consumer Better than Feared? Earnings Revisions Bottoming

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

Eoin Treacy's view

Here is a link to the full report and here is a section from it: 

Meanwhile, with unemployment likely to hit 17% in May, it's no surprise that consumer confidence has fallen sharply, too. However, it's well above its all-time lows reached during the 2008-09 and 1990 recessions. Likewise, retail sentiment has fallen sharply, too but also not as bad as what we witnessed in 1990 or 2008-09. In our view, there is reason to believe that this time, consumer confidence and sentiment may not have to fall to the levels seen in 1990 or 2008-09.

First, the excesses of this cycle were more in the corporate sector. In fact, coming into this recession the consumer balance sheet was in pretty good shape and one of the reasons many thought this economic cycle had more room to run. Second, this fits the historical pattern whereby recessions tend to alternate between the consumer and corporate segments. 1990 and 2008-09 were very centered on the consumer while the 2001 recession was more corporate in the making, like this time around. In short, it makes sense that consumer confidence and sentiment may have already reached their lows even though both are well above 1990 and 2008-09 levels.

The bottom line is that with the stimulus so large and directed right at the consumer and small businesses, we may be surprised at how well the consumer fares in what is amounting to the steepest decline in economic activity in history. If so, it would justify some of the resilience we are witnessing in certain consumer discretionary stocks, an area that may continue to be ripe for adding stock specific risk.

The consumer is holding up for good reason. With an additional $600 a week in unemployment benefits, on top of the $1200 sent to 90% of the population, many people are making more money than if they were working.

For example, this article from the financial samurai blog lists the lowest unemployment benefit available in the USA is $3340 in Mississippi, while the highest is in Massachusetts at $5892. The median annual income is $31,099 per annum or $2591 a month.

Therefore, all unemployed people today are earning more than half of what the population did before the lockdowns. Since many of the people who have been laid off are in the lower-paid personal services, hospitality and leisure sectors, they have a clear incentive to remain unemployed until at least July 15th, when the CARES Act expires.

As economies open back up, we will then see how deep the real jobs cuts are. Considering the fact 2020 is still an election year, there is clear potential the benefits will be extended. The clear risk is higher wages will be demanded to encourage people back to work, and that clearly favours larger companies with wide margins.

Some rotation appears to be underway in the wider market. Some of the biggest decliners of the last few months led on the upside today while the five mega-cap technology stocks are susceptible to some profit taking.

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