If there are reasons to believe that economy is strong and companies will continue to grow and report higher sales and profits, and there will not be any global major risk – then buy the dip.
But how do we find out that people will buy more, spend more, travel more, and overall help economy to grow and companies to make more profit? And we also have to assess global risks – will US enter a recession, will the wars escalate?
Let us check the US economy
If US enters a recession, most other countries will also be negatively affected, just like the 2000 and 2008 recessions. So, we must understand what is happening there.
Since last almost 15 years, the interest rates were near zero, money was easily available to borrow. People borrowed heavily, spent lavishly, bought stocks and created a boom.
Now let us see how is their situation –
Savings are gone
The US economy is out of ammunition as inflation has eaten through household savings.
The dry powder of cash savings that was expected to cushion the economy has run out, as inflation has practically wiped out US households’ excess savings
Interest payments on personal loans
Record high interest burden and low savings mean low spending. Not at all positive for economy.
Credit card loans delinquency rate
High default rate on credit card payments indicate decline in buying power of consumers. This rate is now above the pandemic era rate, which shows a significant stress on consumer pockets.
Credit card interest rate
Very high credit card interest rates are another blow to consumers.
Jobs
Layoffs are rising and that directly will affect consumer spending.
This week, Tesla announced that they will be cutting 10% of their workforce, or 14,000 employees.
Meanwhile, Amazon has already made layoffs this year in an effort to cut costs.
This means that ALL of the Magnificent 7 companies except for Nvidia are expected to lay off employees.
Latest List of Layoffs Over Last 4 Months:
1. Twitch: 35% of workforce
2. Hasbro: 20% of workforce
3. Spotify: 17% of workforce
4. Levi’s: 15% of workforce
5. Zerox: 15% of workforce
6. Qualtrics: 14% of workforce
7. Wayfair: 13% of workforce
8. Tesla: 10% of workforce
9. Duolingo: 10% of workforce
10. Washington Post: 10% of workforce
11. Snapchat: 10% of workforce
12. eBay: 9% of workforce
13. PayPal: 9% of workforce
14. Business Insider: 8% of workforce
15. Charles Schwab: 6% of workforce
16. Macy’s: 4% of workforce
17. Blackrock: 3% of workforce
18. Citigroup: 20,000 employees
19. UPS: 12,000 employees
20. Cisco: “Thousands” of employees
In 2024, we have already seen 74,000 tech layoffs alone with well over 200,000 across all industries.
Last month, the US added a whopping 691,000 part-time jobs while LOSING 6,000 full-time jobs.
Real inflation is rising
Food inflation is important for economy as that is a significant proportion of household budget. If that now takes a bigger part of a person’s income, he will spend less on other items – again a negative for the economy.
Price inflation at every fast-food restaurant in the US has far exceeded CPI inflation since 2014.
Prices at McDonalds have DOUBLED since 2014 while official inflation data shows just 31% inflation.
Prices at Popeyes, Taco Bell, and Chipotle have risen by 86%, 81%, and 75%, respectively.
Traditionally, fast food was considered to be a “cheap” food option.
Now, feeding a family for one meal at a fast food restaurant costs more than $50 in many cases.
Home monthly payment
The monthly mortgage payment based on a median existing home is now at a record $2,322/month.
This is double the $1,200 peak seen in 2008.
Keep in mind, $2,322/month does not include taxes, insurance or any other costs associated with buying a home.
If you add in taxes and insurance, the median is nearly $3,000/month.
That’s $36,000/yr or 51% of the median household PRE-TAX income.
On a post tax basis, the median new homebuyer is spending close to 70% of their income on monthly payments.
This directly reduces their purchasing power and is definitely negative for the economy.
Links to previous related posts – Inflation Super Cycle, How long can inflation continue? Where to invest now?, Housing Bubble 2, The Biggest Recession is Coming (Part 1), Gold – Will its Price Rise Further?, End of the Stocks Rally
Conclusion: Buy on dip – No.
US economy is clearly poised to see lower consumer spending, and a rise in inflation will worsen the situation. As mentioned in various previous articles, there is no action taken by US government to treat the root causes of inflation. A reemergence of inflation is certain. Bad times are ahead for US and so for all other countries.
The smart money will flee from stocks and bonds. But retail investors, most of whom are not bothered about economy and global risks will happily buy the dip. They may not be so happy when the next dips are even lower!
Most retail investors suffer from optimism bias: a well-known psychological phenomenon that causes you to believe you are less at risk of experiencing misfortune than others and overestimating the likelihood of positive events happening. This optimism leaves them unprepared. In India, it is a common belief that even if there is a recession, it will not last long and then there will be a quick recovery, we are the fastest growing economy.
Only a really good psychologist can treat this, this newsletter will not help!
What are the best ways to invest in such scenario
Stocks and bonds will underperform. Commodities will gain.
A market neutral hedge strategy may work well.
Certain global ETFs can do well in inflationary scenario.
You must check our affordable low risk offerings – Hedged Plan and Adaptive Plan (it adapts to macro trends and allocates assets accordingly). If you are interested in high-risk high-returns, check Commodities Trading Plan.