US consumer spending approaching a cliff
The bearish thesis for US consumer discretionary sectors argues that rising energy costs and depleted tax refunds are forcing a sharp pullback in discretionary spending.
The argument
The speakers pointed to Walmart's earnings report showing average gas purchases falling below 10 gallons and consumers exhausting their tax refunds, alongside negative April sales from Home Depot and Lowe's. They argued that wealthy consumers trading down to Walmart is a classic late-cycle warning sign that the US is lagging Europe's downturn by only a few months.
The thesis, stress-tested
✓ What validates it
- ✓Walmart reports further declines in average transaction sizes next quarter
- ✓Home Depot and Lowe's report consecutive quarters of negative comparable store sales
- ✓University of Michigan consumer sentiment index falls further
▸ Risks discussed
- ▸Labor market resilience prevents layoffs
- ▸Gasoline prices decline significantly
- ▸New fiscal stimulus or tax adjustments buffer consumer wallets
Hear it yourself
"What they're worried about is that those costs spill over into what they call second and third order effects, which is, you know, at gasoline prices go up and that leads to higher cost for shipping other stuff around the world. So other goods prices have to go up in response. And because the economy was resilient, at least they assumed it was, that would mean those those prices would be passed along to other to consumers in other prices. And then you all of a sudden you've got this inflation that everybody, you know, is afraid of. However, what are rate what are rate hikes gonna do about this? Assuming rate hikes actually did work, what they're really saying is, okay."
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