Will Consumers Loosen up Their Spending During the Recovery?

North American markets today, Monday January 25 2021 and viewed several hours before opening at 9:30 a.m. EST appear poised to start mixed with the NASDAQ and S&P 500 firmly in the green while the DOW is in the red. The DOW is climbing at time of writing and it is conceivable that it could turn green before or after market opening, especially if the markets react to President Joe Biden’s ‘Buy American’ executive order planned for signing today.

European markets are open at time of writing and major indicators there are in the red, troubled by COVID 19 concerns and the economic impact of lockdowns.

Currencies are also mixed with the British pound and Euro down and the Canadian dollar up. The safe havens are also mixed with gold down and silver trending up. Gold is climbing and could make it into the green by market opening.

In last Friday’s column, I suggested a positive approach to the markets – tempered with an appraisal of some very real risks and I would like to extend that theme today.

The consumer’s place in the economic recovery needs careful examination and the caution may bear repeating, given the hopes we are placing on it. Estimates of consumer dollars not spent due to the need to stay at home during the pandemic range into the trillions and some analysts believe that this money will be unleashed as consumers get out and resume earlier spending habits. That may be true – but we don’t know to what extent. A report from Deloitte Insights cautions that while widespread vaccinations will likely bring increased consumer spending, we won’t be returning to pre-pandemic patterns and the spending floodgates will be different.

The Deloitte report suggests that with the pandemic continuing and full large-scale deployment of vaccines still between six and nine months down the road, COVID 19 will continue overhanging consumer spending along with a continuing weak job market.

That could change in the second half of 2021with rising vaccinations. That, says Deloitte, could lead consumers to start spending more on travel, food service and entertainment than during last year. These categories, of course are three of the hardest hit during the pandemic.

However, there is a risk built into the Deloitte projection. It is reasonable to believe that consumers will loosen up their spending during the recovery, but the ease and prevalence of food delivery services and the habits that have taken shape make it impossible to guess the degree to which dining establishments will recover. Continuing COVID 19 fears, even during the recovery, make the speed of returning to travel by airplane and cruise impossible to project. Dealing with these potential outcomes means treading carefully while looking for bargains with restaurant and travel stocks.

Another unknown is the extent and eventual impact of tax increases by the administration of President Joe Biden. Clearly these moves are amongst his priorities but without knowing how far and how fast he plans to go, the effect on some corporations remains unclear at this time. Much the same is true for regulatory increases: we don’t have a clear picture of their eventual extent and potential impact. We just know that they are coming.

There is also a currency risk built into international investing. Buying shares of a foreign stock actually involves two investment decisions: the appraisal of the company’s potential and the appraisal of the currency involved. The investment pays off when the stock price goes up and the currency strengthens. The reverse is true when the stock price goes down and the currency slides against the dollar. In some cases, the solution could be investing in a currency-hedged exchange traded fund.

As mentioned in the previous column, the U. S China divide has several risks including whether the New York Stock Exchange’s decision to add China Mobile Ltd., China Telecom Corp. and China Unicom Ltd. to the roster of de-listed companies could erode confidence in otherwise unconnected companies such as Baidu Inc. and JD.Com.  At the same time, the Chinese government’s determination to sit on the board of all companies and its clear antipathy to Jack Ma, the president of Alibaba Group Holding Ltd.  should be taken into consideration by anyone investing in that company.

This is not to suggest avoiding Chinese stocks, but rather treading carefully.

Meanwhile, not everything out of China is worrisome. A recent report by the Qatar National Bank argues that while the Chinese recovery is ‘challenged’ by the new wave of COVID 19 cases and that it will cause problems for short-term consumption, recovery will likely continue. In fact, QNB has an extremely optimistic forecast for both China’s recovery and its impact around the world.  “We expect China’s GDP to grow by 8.2% in 2021 and over 6% in 2022, contributing to boost global economic activity.” If the analysts at QNB have it right, China’s influence on the recovery will go beyond valuations of Chinese stocks.

So yes, let’s stay in the markets but let’s tread – and trade --very carefully.

Disclosure: I do not own any shares in any company listed in this column.

Related: Investors Warned To Be More Careful Than Ever Previously