Over the past few years, Americans saved money above what they normally have saved, a situation known as "excess savings”. However, recent data shows that these excess savings have now turned negative. This means many consumers are spending more than they are saving, which could impact the economy and stock market.
What This Means for the Economy
When we save less and spend more, it can affect the economy in several ways:
Less Consumer Spending: As savings decrease, Americans might start to spend less on things they don’t need, which could slow down economic growth. Consumer spending is a big part of the economy, so any reduction can have a significant impact.
Stock Market Changes: Historically, when savings go down and spending slows, the stock market can become more volatile. Investors might become more cautious, leading to ups and downs in stock prices.
Government and Federal Reserve Actions: To counteract these changes, the government and Federal Reserve might introduce policies to stimulate the economy, such as tax cuts or interest rate adjustments.
Learning from the Past
We can look at past events to understand what might happen now. After World War II, Americans had saved a lot of money due to rationing and uncertainty. When the war ended, they started spending, which boosted the economy and stock market. However, as savings ran out, economic growth slowed, and the stock market became volatile.
A similar pattern occurred in the early 2000s after the dot-com bubble burst. Americans initially saved more due to uncertainty, but as the economy recovered, they spent more, helping the economy and stock market recover.
Current Situation
Today, with excess savings running out, we might see reduced spending and increased market volatility. However, the current situation is unique because of the pandemic, inflation and other global issues, making it different from past events.
Sectors That Perform Well When Excess Savings Turn Negative
When excess savings turn negative, certain sectors tend to perform better than others. For instance:
Consumer Staples: These include essential products like food, beverages, and household items. Consumers continue to buy these necessities even when they cut back on other spending.
Utilities: Companies that provide essential services like electricity, water, and gas tend to be stable and perform well because their services are always in demand.
Healthcare: This sector often does well because medical services and products are essential regardless of economic conditions.
Discount Retailers: Stores that offer discounted goods can see increased business as consumers look for ways to save money.
These sectors are well-represented with the iQ Recession 10, iQ Defensive Sector, and iQ Defensive Super Sector models.
What This Means for Investment Advisors
For investment advisors, it is important to manage a portfolio of low-correlated assets and strategies…including strategies that may include stocks of defensive and essential sectors. Monitoring how savings and spending trends evolve and how the government and Federal Reserve respond will help in making informed investment decisions.
While the decrease in excess savings poses challenges, it also presents opportunities for strategic investment. Knowing which sectors tend to perform well during such times can help guide investment strategies.