Dear Clients & Friends,
Given the business of tax season and the volatility/chaos that is currently gripping America, it’s been difficult for us to find the time to write good informative articles about our concerns and fears regarding the economy as well as society. We are going to try to put out a few articles over the next 2 weeks and get back into our “Weekend Reading” saddle. We will then more broadly discuss tariffs, immigration, the lack of policy clarity, and its effect on the market in the coming weeks.
But first, let’s objectively discuss the current consumer-led economic worries.
Consumers make up roughly 70 percent of U.S. GDP. Consumer spending has been raging over the past few years, and it kept our domestic economy incredibly resilient even during the inflationary years of 2022-2023. We’ve poked fun many times at the overwhelming fears of a recession during this time period because the economy was robust, and employment was full. Quite simply, it’s hard to have a recession when an economy is at full employment. That dissonance ushered in one of the easiest “dip buy” strategies in my career.
But we are no longer at full employment, due to recent layoffs and furloughs of federal employees. More importantly, when both consumers AND producers experience uncertainty, people and companies tend to slow down spending dramatically. Businesses don’t know how to properly deploy capital, and consumers begin hoarding money. Both negatively impact a consumer-driven economy in the short run, and recessions often start when a minor drawback causes an unwarranted wide swing of the pendulum.
Chris Fasciano tells a good tale of the last few years in a recent blog post. Chris has a degree in economy from Bates College and an MBA from the UNC Kenan-Flagler Business School. Here’s his brief takeaway.
Consumer Spending: 2020–2024
Five years ago this week, the global economy shut down. Initially, we retrenched our spending patterns and binge-watched a lot of Netflix. As we adjusted to the new normal, we began projects around the home. We spent money on durable goods such as appliances and furniture, even as supply chain constraints caused shortages in items like washers and dryers.
Slowly, we began to go out and do things. Our attention turned to experiences. We spent money on dining out, vacations, concerts, and sporting events. The Swifties got most of the economic headlines, but tickets to most big events were hard to come by. (I learned this the hard way when I promised my kids we’d go see the Celtics over the holidays!) From the end of 2020 to the end of 2024, consumer spending averaged annual growth of 4 percent.
The Consumer in 2025
The economy entered the year with solid momentum. Job growth was strong at year-end, and a solid employment environment generally leads folks to spend money. Still, perceptions can quickly change, and the consumer seems to be going through such a change currently.
I feel like our current analysis of prevailing metrics seems bland without the social perspective and the current – and very real - fears regarding the economy. However, the mathematics of late are what they are.)
In late February, the Conference Board released its monthly Consumer Confidence Index. It showed the third straight month of declines and the biggest monthly drop since the summer of 2021. Interestingly, it wasn’t the view of current business conditions that concerned those surveyed but the view of the future—specifically the cost of living.
Inflation has proven stickier than both investors and the Fed expected. Recently, surging egg prices due to the impact of bird flu and higher prices for used autos due to the California wildfires have added to the ongoing concerns about the price of shelter. This was reflected in a jump in the 12-month inflation expectations contained in the Conference Board report. Similar concerns were seen in the University of Michigan Survey (see chart below).
Source: The Daily Shot
Consumer concerns manifested themselves in the January personal spending data. Personal Consumer Expenditures declined by 0.2 percent in January. This was the first monthly decline seen since March 2023. Spending on real goods fell while spending on services eked out a small gain of 0.1 percent. But even this growth rate was the lowest seen in two years. As always with economic data, there are caveats. Cold and snowy weather could have impacted consumer behavior in January. Plus, consumers were coming off very healthy spending patterns in the fourth quarter of 2024.
American Consumers Are Resilient
Certainly, consumers are facing some headwinds they haven’t encountered over the past couple of years. Concerns about inflation and job security are understandable, and revisiting spending plans is a normal offshoot of these feelings. But American consumers have proven to be a resilient bunch.
Despite an uncertain economy, Friday’s job report was solid, with 151,000 new jobs created in February. Removing the month-to-month volatility, job creation has averaged a healthy 191,000 jobs since September.
This metric may begin to unravel with the ongoing layoffs and furloughs directed by the White House. Forecasts are difficult to make because of the ongoing volatility - for example, two of the large layoffs, at the CDC and USDA, were already reversed within the last 48 hours; the courts concluded that the new heads of both organizations illegally fired employees without due process.)
In a speech on Friday following the jobs report, Fed Chairman Jay Powell gave a fairly upbeat assessment of the economy. He stated that the U.S. macro environment is in “a good place” with a “solid labor market.” This backdrop should continue to support consumer spending.
Consumers should also benefit from the rally in the U.S. Treasury bond market, where rates on the bellwether 10-year have dropped to 4.2 percent. This rate affects mortgage, credit card, and consumer loan interest rates, which should eventually put money in borrowers’ pockets.
Balance and Diversification Remain Key
Chairman Powell also said the Fed is “focused on separating the signal from the noise as the outlook evolves.” That makes perfect sense from a central bank perspective—but it’s also pretty good advice for investors and their portfolios. Headlines move markets day-to day, which we are seeing right now. But timing markets is difficult, if not impossible. Further, adjusting portfolios based on the daily headlines seems rather challenging.
During this period of volatility, returning to the tried-and-true rules of portfolio construction could be warranted. Balance and diversification are key tenets to navigate any market uncertainty. Different equity sectors, asset classes, and geographies have performed well this year compared to what we have seen over the previous few years. And bonds have served their purpose of muting equity volatility as has historically been true.
Here’s what we can conclude during this difficult time: emotions and fear move the markets in the short run. Economic factors drive the markets in the long run. Despite our firm’s concerns, and my personal fears regarding what lies ahead, I am not ready to predict the end of global capitalism.
If you are retired, please remember: no matter how aggressive your portfolio may be, you should have at least 3 years of investments and/or financial resources not allocated to the “risk-on” stock market. That’s a pillar of proper asset allocation policy that we at MORWM strictly adhere to unless there are specific and explicit reasons not to. And if you’re among that vast minority, you are aware, and we discuss it regularly.
To those of you who are still in your working years: we’ve yet to identify anyone without job security as a result of Trump’s policies that does not also have deployable liquid capital to sustain themselves.
More to come, probably more controversial. Until then, have a peaceful weekend.
-Your team and advocates here at MORWM