Thursday, 30 April, 2020
Last Thing Stocks Need Is Consumer Crunch
The sustainability of the U.S. stock rally will be determined in part by consumers and their behavior after lockdowns. With price pressures squeezing households’ wallets, it may not be the case of a return to business-as-usual that equities are pricing.
- Earnings season has seen more than a quarter of S&P 500 reporting firms withdraw guidance, and consumer discretionary has far surpassed its sector peers in terms of abandoning profit outlooks. At the same time, earnings estimates for 2021 across the consumer space look too rosy, expecting a swift snapback in profits and failing to capture the shift in underlying trends and changes to operating models ahead
- A dimmer outlook than what investors and analysts are expecting may be warranted as consumers are threatened by a potential wave of firm bankruptcies and job destruction. Not to mention a likely surge in household insolvencies, based on estimates of employment and debt servicing assumptions
- More than half of global firms will not have sufficient cash and revenues to cover expenses over the coming year, according to the BIS. Consumer services, entertainment, hotels and leisure lead sectors where cash buffers fall short of near-term debt expenses
- The end of lockdown periods won’t guarantee a sudden boost to household spending; in fact, they’re expected to be reduced sharply over the next year. The latest Survey of Consumer Expectations shows U.S. cutbacks likely to be greatest in Southern states set to re-open first
- The latest source of pressure on consumers is a surge in food prices on account of supply chain disruptions. Costs have already jumped by more than 4% in the U.S. and in several European and emerging markets since mid-February. And pressures look to build with Europe and Canada relying disproportionately on seasonal farm workers and plant shutdowns in the U.S. signaling shortages ahead
- A shock to the global food chain would drag consumer spending lower, reducing the likelihood of a swift recovery. A 5% rise in food prices, on its own, would drive annual U.S. growth lower by nearly a full percentage point, according to the Brookings Institution
- Of course, not all consumer-dependent sectors are created equal and some will fare better than others on the other side of the health crisis. Beyond a renewed focus on necessities like food, permanent behavioral shifts will see growing demand for health products and e-commerce, according to Nielsen Global Connect
- Some companies are gearing up to cater to this shift. In a post-earnings investor call this week, Adidas underscored the importance of digital acceleration and said it plans to ramp up to this area of its business. Meanwhile, WW International — the diet company formerly known as Weight Watchers — reported better-than-expected 1Q results and is continuing plans for a virtual program later this year
- All in, plans for a gradual relaxing of restrictions are buoying expectations that in life after lockdowns, a return to business as usual can carry equities. A rude awakening awaits as squeezed households plus shifts in consumer behavior promise a bumpier ride ahead for stocks
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