Never mind the economy, stocks are crushing it as revealed in our Bubble Monitor dashboard for the period ended Thursday, August 4, 2022. The tech-heavy Nasdaq is up +12% for the month, small caps (Russell 2000) are up nearly +10% and the S&P 500 is up over +8%. Shockingly, the best performing sector ETF was the consumer discretionary XLY which was up +19% for the month. Those numbers would be good for the beginning of a bull market if only the companies reporting 2Q results were talking about a great second half – which we haven’t heard. In any case, the bond market didn’t get the memo and we still have an inverted yield curve in which the 10-year rate of 2.66% is still a good chunk below the 2-year rate (3.02%). We like to remind that this is a good indicator for a recession – well, that and 2 consecutive quarters of declining GDP. Let’s not forget falling oil prices which are also attributed to a recession. Step out of the Metaverse, and it should be obvious to all that the problem is with the consumer. Consumer loans are at an all-time high at $891B while real disposable income (adjusted for inflation) was down -3% y/y in June 2022 and further down -12% since peaking in April 2020 when the stimmy faucet first opened. This is very troublesome when considering +9% inflation (including a +5.8% rent CPI) and a steady dose of Fed rate hikes to further squeeze over-leveraged consumers. If only all that hot air in the stock market could fill the sails of main street – then we would have a hurricane of economic growth that would be worthy of all these Fed rate hikes.
Last week we analyzed financial results from Walmart & Chipotle to interpret how consumers are faring in the current economic environment. This week we take a further look at results from McDonald’s & Wingstop to confirm our initial interpretation. McDonald’s 2Q22 same-store sales increased +3.7%, and while their lower-income customers are trading down to value offerings, customers from competitors are trading down from casual and fast casual to McDonald’s. Similarly, Wingstop reported that the lower-income demo pulled back on overall QSR (quick serve) frequency. Fortunately, the chain’s frequency (3x/quarter) was sustained by: customers treating the brand as an indulgent occasion; and the offer of more value options. In any case, small business operators (including restaurant franchisees) are struggling to pass along a huge spike in operating costs to their customers. Notably, 45% of independent restaurant operators recently reported that they couldn’t pay their full rent this month! This is a real attack on the core of our economy given that 54% of all private sector GDP is driven by family-owned businesses. Without an abundance of small business competition, there is no way to check price gouging monopolists who can hold consumers hostage over the scarce supply of necessities like food & energy. Keeping all this in mind, it has never been so important to advocate for economic policies that benefit entrepreneurs and small businesses!