The issue with low consumer spending

Flights being slashed, events canceled, businesses quarantined, and the government’s trying to come up with measures to stop the slowing of the economy (like a potential stimulus and Fed rate cuts).

But let’s look back… this damage began during the trade war.

The Fed began slashing rates during the trade war, and ongoing back and forth issues with China contributed to market volatility, potential supply chain disruptions, and the glaring reality of our dependence on China. 

There was so much talk of how much damage the trade war would do, and it did have the potential to be severely damaging due to the supply chain impact and impact on consumer spending — but, the difference here is…

The trade war was ultimately resolved before it caused severe damage. It didn’t have a huge impact on consumer spending. And now, we have the threat of the coronavirus, which is a very real stock market and economic threat, and the Fed has already used tools arguably a little early that they really need now. 

The coronavirus may be what delivers the final blow to the 11 year bull market, and here’s why.

The problem here is that rates are already incredibly low, and there isn’t much lower they can go. This gives the Federal Reserve little room to come to our rescue. Rate cuts are supposed to stimulate spending, but when people aren’t leaving their houses in major cities across the US, there’s only so much this type of action can help. Additionally, even upon the Fed emergency cut last week, the market reacted with vigor, but, it was to the downside! Historically, Fed rate cuts have been bullish for the economy — not so, in this instance. 

That was a very key signal to me that even the Fed can’t save us now.

This was a key issue that I brought up during trade war volatility — if the Fed cut too much at that time, they wouldn’t have as much power to react later down the line, if something else happened. 

Additionally, the main issue here is a lack of consumer spending, which is impacting a wide variety of industry groups, including retail, travel, energy, etc. This is a shock that’s hitting a variety of industries, in a big way, at the same time. It’s an unknown, something that the Fed isn’t used to combating with additional monetary adjustments. Nobody knows if — or when, consumer spending will come back on airliners or cruises, or, how much worse it’ll get in the US. 

Well, here’s something else. So, what about a tax stimulus?

I mean, President Trump is taking reasonable action, but the stock market is facing a steep decline upon coronavirus and the Dow entered bear market territory recently. 

Do I think the government can use stimulus to fight our way out of this economic shock?

No. Here’s why. 

Watch Danielle discuss the impact of the coronavirus on the economy above, on TDAmeritrade Network, live from the Nasdaq in New York City

The video above provides the background, but here’s the main issue…

During the trade war, the major caveat was that consumer sentiment and spending was still strong. Consumer spending makes up a very important part of the economy, and with coronavirus self-imposed/business imposed/city-wide imposed moves, this is proving to be a drastic shock to consumer spending. China has been dealing with this for 8 weeks. We’re just seeing the impact in Seattle, as major universities have cancelled classes and major companies are all telling employees to work from home. While big tech can do this, and employees in companies like Amazon and Microsoft can probably survive, what about the money they aren’t spending to put gas in their car, the lunch they bought every day, the shopping they would do, or the cocktails after work? 

This is an enormous economic impact that’s only just beginning in the United States.

At this point, it’s pretty clear that containment of the virus isn’t entirely possible, and the impact of the actual virus itself is up for discussion. The number one risk to the US economy and stock market at this point is the fact that conferences, companies, schools are literally closing their doors and this’ll provide a shock impact to the economy as consumer spending halts, businesses lose money (we’re already seeing this with United Airlines that came out and said that they’re slashing flights and want employees to offer to take leaves of absence). As the stock market falls, this additionally hits consumers and companies making them less likely to spend money and invest in new projects. 

The most dangerous part I believe is the fact that we went into this with the highest debt levels in history — and with this shock to the economy, it’ll only be so long before people can’t make debt repayments, and that’s how it could really get nasty. 

IF companies continue to cancel conferences and events, employees are told to stop travelling, and people still don’t want to leave their homes — this is going to be the blow that reverberates throughout the stock market (and corporate earnings!) and the economy. 

So, what do we do?

If and until the coronavirus fear comes to a stop — and people feel comfortable flying, conferences are back on, and gatherings aren’t a scary situation, we can expect consumer spending to take a hit, and therefore corporate earnings and lower prices in equities. 

Earnings season is upcoming, and while I normally look for a run into earnings, I’m absolutely not looking for that this quarter. In fact, earnings could be a substantially worse blow to the stock market, in the near term, that what we’ve already seen. This is where we’ll see the true impact of the coronavirus.

At this time, we just don’t know how bad it’s going to be. It could be not so bad, or, it could be terrible. There are a lot of unknowns. 

So, how am I trading it? 

Currently, I’m focusing on short-term timeframe trades, focusing on trading the indexes, both in the options and futures market. The futures market is particularly beneficial for these moves, because they happen so quickly. Almost every night, we see a major gap up, or down, in the indexes that provides opportunity in the futures market.

If you want to see how I’m trading it, join my mastery to get my daily push notifications and market updates, because as we know, it continues to change on a rapid basis! 

10 thoughts on “The issue with low consumer spending”

  1. I have read and watched a lot of stupid, illiterate comment in my 50 years on this planet with people who have a brain the size of a pea and this one is no exception. All the liberal garbage on CNBC, CNN and NBC and the rest of the drive by media fail miserably when it comes to the truth.
    Instead they dwell on how much fear they can instill.
    China started intentionally by some reports against away to punish the riots in Hong Kong but irregardless the virus spread from their unsanitary lifestyle. One or the other or both it happened. But ONLY looking at the facts….more people die world wide from the Flu than corona virus every year. Nobody but no one not even the pea brains mention that! Just continue to spew more fear because you can. I suggest you do some homework before your next diatribe.

    Reply
    • Hey Jim,

      I don’t have any interest in instilling fear, I trade the market and how the market is responding to the current pandemic. I don’t have a stance on how dangerous the virus is, as that’s not my specialty. However, I do specialize in markets and the market fears the impact to consumer spending, because it is in fact taking a huge hit. This impacts corporate profits, along with the money small businesses own and the ability that they have to pay their employees. Multiple major companies have come out and noted this through their earnings adjustments, and major cities like Seattle are noting the severe impact the shutdown has had on their citizens.

      Regardless, the market is in a historically volatile phase due to the pandemic, and I trade it how I see it.

      Thanks,

      Danielle

      Reply
  2. Right on Danielle. In what we do, it’s market perception that matters.

    Jim G: What your missing with your numbers is the timeframe – you’re comparing an entire year of flu to 2.5 months of COVID19; and the number of cases of COVID19 is accelerating quickly. The numbers on the CDC site show the mortality rate of COVID19 is 30 times higher than the common flu (~3% vs 0.1%). This is why I prefer to look at rates rather than absolute numbers. The mortality rates say that, if COVID19 is around for a full year, it will surpass the common flu in absolute numbers, especially given the parabolic increase in cases this month.

    Reply
  3. Danielle, you have a logical commentary. It is well thought out and unfortunately, there will be those that be emotionally moved by your perspective. There is much value to your analysis and it is appreciated.

    Thanks for sharing

    Reply
  4. re: “Regardless, the market is in a historically volatile phase due to the pandemic, and I trade it how I see it. ”
    re:”If you want to see how I’m trading it, join my mastery to get my daily push notifications and market updates, because as we know, it continues to change on a rapid basis! ”

    I may consider joining your mastery program if it has a positive performance and growing equity curve.

    As the saying goes: “Talk is cheap”.
    Analysis, opinion and commentary are all meaningless when it comes to trading.

    The only thing that matters in the equity curve of the strategies that you are using in the mastery program.
    If you claim to be an expert trader that is teaching others how to trade, then there should be no problem showing the performance numbers and equity curve.
    What is the total PL and the per month PL for the program?
    Where can I see the equity curve?
    If you cannot provide this information then how do we know if your strategies are winning strategies with a positive edge ?

    Thanks

    Reply
    • Hey Arnie,

      Thanks for your question. My Mastery has a spreadsheet, where you can find all the trade entries and exits since the program began in August.

      Since that time, I have quadrupled my futures account and quintupled my options account. Returns vary based on market condition. As I am a momentum trader, higher momentum markets equal more profits and choppy markets equal less as strategies and conditions vary. Returns in the Mastery program are a bit less, as this is supposed to be a conservative, swing based program versus more aggressive trading I do in my personal accounts and in the live, options trading room. We do not publish average ‘per month’ as the market conditions vary, but like I said the data is available to the members within the program.

      Thanks,
      Danielle

      Reply
      • Hey Danielle,
        If I understand what you are saying, anyone who wants to review the performance to determine if the strategies in the Mastery program are winning strategies with a positive edge, has to first join the Mastery program.
        This seems disingenuous.
        Any professional trader has to provide performance results up front so that they can be reviewed.
        If you are a professional trader that is teaching others how to trade, and if you have winning strategies with a positive edge, why don’t you provide the performance information without having to join the program ?
        Otherwise there is the obvious doubt if you are asking people to trust you without showing the results up front.
        As you know there is no shortage of charlatans out there in this business, but I do hope that you are not in this category.

        I’d really like to see the performance information up front if you claim to have “quadrupled my futures account and quintupled my options account.”.

        Thanks.

        Reply
  5. Jim G: I try to be positive and believe that things get blown out of proportion by the ‘Chuckle Heads’, BUT, Doctors and Nurses don’t normally die form the Flu, as there is a course to treat it.
    Danielle has lay’d out on the table some very basic facts that could have an impact on the way in which the market may move. Giving us all higher probability of successful trades. Not to mention a systematic way of trading it.

    Danielle: Thank you for your insights and direction.

    Reply
  6. Danielle is on the right track and starting a conversation and concern over future earnings. I believe we are headed for another major down draft in our markets because of the basic math of what creates an S&P price. As an example; if the S&P has $133.00 in annual earnings with a multiple of 19 we would expect a price of $2527, however if the earnings are deduced to $120 because of consumer spending etc… and expected to remain low for the next three quarters who would want to pay a 19 multiple, the mean P/E multiple is 15ish, so $120 * 15 = $1800 expected level for the S&P. The U.S. would take 2 to 3 quarters to begin a push up on the adjusted earnings to support a higher S&P price. These numbers are I am using are only as a model, I am trying to get settled on what the numbers may look like for this year. I would be concerned in your upside expectations for the next two quarter earning report.

    Reply
    • Hey there,

      Thanks for your response.

      Yes, I agree and this is currently my main concern for the market. Earnings will definitely be impacted, at this time it’s just a function of how much.

      -Danielle

      Reply

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