Why your portfolio’s future may hinge on your travel plans

These past few weeks have been a broken record of people asking if we’re in a recession or not. Family, friends, colleagues… even Cardi B.

Today, I’m here to set the record straight. We may not be in a recession, if the data is any indication. Nonetheless, there’s a clear rift that you should be paying attention to.

Americans are still spending at a healthy rate, and consumer spending is the bedrock of a growing economy.Yet it’s becoming more apparent that spending is slowly pivoting from goods, like that big TV you bought in the depths of the pandemic, to services (or experiences) ― eating out, traveling, meeting up with friends.

Your big vacation budget may be keeping growth afloat, but it could also be pushing the markets and the Federal Reserve into an even trickier situation.

From TVs to travel

Over the years, there has been a noticeable shift in the US economy, as far as how people have spent their money. Just before the COVID pandemic, experiences made up about 70% of Americans’ monthly spending, while goods made up the other 30%.

But for most of the past two years, many of us haven’t felt comfortable ― or were prohibited from ― gathering with others. In the early days of the pandemic, we spent less on experiences and more on “nesting” purchases: building that home gym, upgrading that TV, splurging on that new video game console

Today, we’re (hopefully) past the worst part of the pandemic and getting back to more normal spending patterns. Except now, many of us have exhausted our need for new stuff. At the same time, temperatures are warming up and international destinations are opening up. Cue “hot vax summer 2.0” as we take those much-needed vacations, attend those belated parties, and check out those restaurants we’ve been dying to try.

Goods and services spending is still off-balance compared to the pre-COVID days. Services make up about 65% of monthly expenses, compared to 35% for goods. Thankfully, consumers seem to be pulling through in a critical juncture for the economy. Overall spending growth is still robust, even though fear has risen about a recession as the Fed is moving quickly to hike rates.

The resiliency of the American consumer is one of the best economic storylines right now, even if a shift in priorities is underway. Recent recessions have been accompanied by a plunge in spending, but we haven’t seen that yet.

Economy ≠ stock market

It may not be an easy path forward, though, especially for investors. Services make up a big part of the economy, but services-based companies are a minority in the stock market. By our count, just 42% of the S&P 500 are service providers (vs. the 70% they normally account for in consumer spending). Those restaurants, salons, and other destinations you’re frequenting now probably aren’t publicly traded companies. The economic momentum could shift from stock market giants to small businesses ― a trend that may not impact overall growth, but could lead to more unsettling market headlines.

We’ve already seen a bit of this wave in big-box retailer earnings, namely Target’s recent warning about squeezed profits and excess inventories. 

Lower demand for goods could put pressure on global manufacturing, too. It’s the opposite scenario of what we’ve seen for the past several months. Stores have loaded up on inventory, and now that fewer people are buying, US import volumes are starting to slip with the need for manufactured goods and materials. This small shift could have big economic ramifications for the global economy, which is arguably in a more precarious position than the US. Higher tourism and less supply chain pressure may counter lost demand, but the slide in manufacturing may overpower any benefits.

Stickier inflation

And then there’s inflation, the thorn in the economy’s side. Up until now, goods prices have driven the rise in inflation — used cars, apparel, furniture, for example. But over the past few months, we’ve seen goods inflation slow while services inflation — think price growth in rent, insurance, medical bills — has picked up.

This may be a problem in the Fed’s eyes. Fed chair Jay Powell has made it clear that they want to tame inflation, and there’s been hope that lower demand can help ease price pressures. But this shift to services spending could actually make the Fed’s job more difficult. Services prices tend to be stickier — or change at a slower rate — than goods prices. So while inflation may have peaked already, it could stay stubbornly high for a while with services demand so strong. 

So yeah, “hot vax summer 2.0” may be the economy’s saving grace. But we may not be mentally prepared for the obstacles that the markets face as we digest this shift in demand. We could see ups and downs, a slower bounce back, and more celebrity tweets asking if we’re in a  recession or not. By the way, the National Bureau of Economic Research makes the official recession call, but they haven’t said anything yet.

For now, focus on how your investments align with the changing tide. And while it looks like we’re not in crisis mode yet ― just a slowdown ― be prepared for all scenarios.

 

*Data sourced through Bloomberg. Can be made available upon request.