A picture is worth a thousand words.
Fred R. Barnard is credited with coining the phrase 99 years ago to explain the usefulness of graphics in advertising. Here’s the ad he posted (strangely devoid of graphics…):
Today, we’ll see that a chart can be worth a thousand words – and perhaps many more dollars.
I hope charts count, because the chart I just saw convinced me of something that a thousand words couldn’t have: It turns out that Americans today, on average, are awash with money.
Record amounts of money, in fact.
Yeah, I found it hard to believe too.
With unemployment close to 20%, millions of people working remotely or at fewer hours, and thousands of businesses still closed because of Covid-19, you’d think Americans, as a whole, would be struggling in almost all measurable areas.
Now, don’t get me wrong, millions of Americans are struggling right now. I’m making efforts here in my hometown to help those who need some extra assistance. I bet that most people reading this are doing the same. Because as independent-minded as Americans are, we sure know how to dig in and help others when the need arises.
It was only two years ago that the Fed revealed that almost 40% of American households would struggle to come up with $400 to pay an unexpected bill.
That showed millions of Americans living paycheck to paycheck, even before the pandemic.
But one thing has changed this year, and it’s going to keep pushing this stock market rally higher.
It all comes down to that chart I mentioned…
Suddenly, Americans are Sitting on Trillions of Unspent Dollars
Take a look at this chart from the Fed, showing how much of our personal income Americans are saving or investing:
As you can see, we’ve just seen an astonishing and completely unprecedented spike in savings.
These records stretch all the way back to 1959, and the previous peak was at 17.3% in May of 1975.
In fact, for decades economists have been complaining that American consumers spend too much of their money instead of saving it.
Well, those economists certainly got what they wished for.
Because as of April, the last month for which data is available, Americans were saving 33% of their income.
That’s almost twice the record from 1975.
This spike in savings is a huge reason for why markets have been rising for weeks despite the mostly bad news.
You won’t see this mentioned much in Big Media or talked about by Wall Street, unfortunately. It just doesn’t fit with the narrative.
But before we get into that, maybe you’re thinking there must be something off about this savings rate data.
Surely Americans are too badly off to suddenly have more money than they know what to do with. After all, food banks are seeing record demand. Feeding America, the country’s largest network of foodbanks, is now predicting a $1.4 billion shortfall in funding as record numbers of people struggle to get food.
You’re absolutely right.
Many Americans are having difficulty making ends meet right now.
But not all of us.
Let me show you…
The Covid-19 Crash is Affecting Us All Differently
There’s no denying that the least well-off Americans have been hit hard this year. This demographic tends to live in the most densely populated areas where the coronavirus spreads the fastest.
They also tend to be essential workers, who have kept America running throughout the lockdowns by staffing grocery checkouts, stocking shelves, and delivering Amazon packages.
All at risk of infection.
That is if they’ve managed to keep their job. It’s clear that the least wealthy have been hit hardest by layoffs so far, after all.
And the 25% of Americans with the lowest income also have recovered their spending levels the fastest.
Take a look at this chart, showing how consumer spending in America has changed this year, by income:
Source: New York Times
As you can see, the households in zip codes that mark the bottom 25% of income, shown by the light green line, cut their spending by 30% in late March.
That’s when states were locking down, businesses were closing, and people were losing their jobs.
But as the federal government’s stimulus checks began arriving, spending ticked up. States beginning to reopen hair salons, restaurants, and other labor-intensive businesses also helped.
At the same time, many states started suspending all evictions for missing rent payments. In effect, that meant those struggling with money could postpone paying rent, at least for a few months.
Add the extra $600 in unemployment payments, and you can see that the spending of the worst-off American households had recovered to just 5% below the pre-pandemic level.
But as you look at the other lines on the chart, you can see that the better off a household is, the less their spending has recovered…
There’s Only So Much You Can Spend on Canned Chickpeas
The households in the top 25% of income earning zip codes haven’t started spending money anywhere near the old rates. At the beginning of June, their consumer spending was still down about 17% – having recovered less than half from the early June lows of 36%.
This is actually a bigger deal than it might appear. Because while this is just one-quarter of American households, they account for much more than one-quarter of income.
In fact, their decreased spending accounts for over 66% of the fall in our national consumer spending.
And it’s not because of any direct need. By and large, the top 25% of households by income have been shielded from most layoffs, and they’re not struggling with rent.
Instead, it’s that they just can’t spend money on what they used to: nice restaurants, travel, hotels, entertainment, and so on.
All those things have been closed for months.
That’s why researchers at Harvard report that many businesses in wealthier neighborhoods are struggling more than those in poorer ones, where the economy is starting to recover:
Source: New York Times
Now, we know that the top 25% of households by income haven’t lost their jobs as much as others. So the money is still coming in.
As you can see, this money isn’t being spent.
So instead, it shows up as “savings.”
That’s why that Fed chart from before shows a historic spike in the savings rate.
It’s also why the Federal Deposit Insurance Corporation has reported a record amount of cash hitting checking accounts this year – with banks reported over $2 trillion in additional deposits.
That’s the spike at the right of this chart from the Fed:
In April alone, $865 billion flowed into American checking accounts.
That’s more than the previous deposit record for an entire year.
By now, you might have guessed where a huge chunk of this money has headed…
That’s right – into the stock market.
Stocks are the Only Game in Town
Whether you believe in this rally we’re seeing right now or not, one thing is clear.
The stock market is the only easily accessible asset that will grow your money right now.
With interest rates at record lows and banks awash with all these deposits and stimulus, interest on checking accounts is practically zero.
Bond yields are at record lows, also thanks to the Fed.
Emerging markets are struggling.
Whether you simply can’t find anything to spend money on, you’re worried about a second wave, or about losing your job, you have to grow that money somehow.
The only game in town that might give you any return is the U.S. stock market.
That’s been a huge boost to the recent stock market rally. The system is flooded with money, and there’s simply nowhere else for it all to go.
So it goes into stocks, and the buying pressure pushes prices up.
It helps that businesses still have some of the Paycheck Protection Program money left, that businesses are reopening, and that the Fed continues to backstop bonds and banks.
This buying pressure on stocks will continue as long as people can’t spend money on discretionary, travel, and luxury services. Paradoxically, that might mean that an extended coronavirus surge could actually boost stock markets, in the short term.
And this newfound savings bonanza is a big reason that markets are unlikely to revisit the March 23 lows, even with negative headlines ready to pop about the virus and its economic effects, trade trouble with China and Europe, and other outsides disruptions simmering in the background.
What to do with any long-term money you have on the sidelines? In addition to the quality names we’ve talked about before – the FANGMA stocks – I like diversifying those tech holdings with off-shore companies that have long-term staying power. Both Alibaba (BABA) and JD.com (JD), China’s two biggest online retailers, have proven their ability to navigate a major crisis and come out on top. Finding pullback points to add those companies is a prudent play in the world’s second biggest economy.
Great trading, stay safe out there and God bless you,
D.R. Barton, Jr.