Macro Insights: Growth concerns starting to bite harder

The state of the US consumer; payroll data will be key

This shift in narrative is raising some key questions about the strength of the consumer which has been the key pillar of strength in this extremely tough macro environment. With inflation and interest rates in record high territory, consumers are likely to find ways to cut costs. This translated into a reduction of excess savings last year, as spending shifted from goods to services and from high-priced goods to lower-priced goods. Some risks have emerged to a deterioration in services demand as well, with the December retail sales print also showing a deterioration in restaurant sales, which serves as a proxy for spending on services.

But with the labor market still tight, it is hard to see consumer spending decelerate sharply. That being said, markets will continue to look for more signs to judge the state of the US consumer and a big focus will be on labor market and wage data going forward. Wage pressures are cooling, especially in industries that saw the largest wage gains over the past year due to labor shortages, including leisure and hospitality and wholesale trade. But for now, jobs are still growing and that keeps the outlook of the consumer supported against any sharp and steep reversals. In the weeks to come, we could see market volatility shifting away from CPI days to NFP (nonfarm payroll) days as the jobs data comes under greater scrutiny.

Watch for earnings

The next nonfarm payroll data is after two weeks (due 3^rd February). In the meantime, markets will be getting a lot more to digest from the earnings front. Consumer staples giant Proctor & Gamble reports today, followed by Kimberly Clark next week. After Netflix reports today, tech earnings also pick up next week with Microsoft and Tesla reporting, while Apple, Amazon, Alphabet and Meta report earnings a week later. Factset estimates that S&P500 will report earnings decline of 3.9% YoY in Q4, as analysts are revising their estimates lower. Our Equity Strategist Peter Garnry has also written numerous equity notes suggesting that company earnings and margins are likely to come under pressure this year as pricing power declines and costs (esp wages) remain sticky.

Investment Implications

We believe that earnings disappointments will continue to spark further fears of an economic slowdown. But the global recession fears are for now taking a backseat with Europe weathering the energy crisis better and China’s economy reopening at a rapid pace. For now, inflation fears continue to be somewhat more pronounced but if recession fears start to take a firmer hold, that could likely nudge investors towards safe havens such as bonds. If market pricing for economic growth deteriorates further, earnings estimates could get hurt even more and we could potentially see more pain for growth stocks. This necessitates the importance of a diversified and balanced portfolio once again, despite dismal results for a 60/40 portfolio last year. We also believe Asian equities have the potential to outperform US equities in 2023, as discussed in this video, and provide some attractive valuation levels to consider.