Everyone from Uncle Sam to Joe Six-Pack is spending like there's no tomorrow. The hot GDP print of 4.9% is the latest evidence of that.
Sounds great. Hot spending is fueling economic growth.
Just one problem.
On the whole, spenders across the board don't quite have the finances to back it up. And once America's capacity to spend, spend, spend runs dry, it's very possible that the long-predicted and thus-far-wrong-predicted recession could finally rear that ugly head.
Today, I want to check in with the American consumer — and the government, for that matter — and see what the other end of this spending spree could look like.
Then, I'll show you what you should do to play defense if the 2020s start to look more like the 1970s.
"Resilient" has been the common refrain to describe the American consumer thus far this year. And we're seeing that resilience in the official inflation numbers.
Core Personal Consumer Expenditures (PCE), the Fed's preferred gauge of price increases, came in at 3.7% year-over-year — right in line with expectations.
But month-over-month, the PCE including food and energy prices jumped 0.4% – the biggest such jump in four months.
And the Personal Consumption rate rose 0.7%, outpacing income growth at 0.3%.
These numbers alone tell us that Americans spent more than they took in over the last month. They're, as a financial advisor might put it, "living above their means."
This comes as the personal savings rate is at its lowest point since right before the Great Recession in 2007.
The default rate on credit cards is right at a 10-year high (though still relatively low, under 3%)…
And outstanding credit card balances are at all-time highs and climbing at among the fastest paces ever.
This paints a picture of an American consumer who's stretched well beyond their means, but keeps plumbing the couch cushions for nickels and dimes to keep their spending habits the same.
They're not getting much inspiration to rein it in from Uncle Sam, either.
The U.S. government is estimated to spend $6.3 trillion this fiscal year, a close second to the highest spending year ever, the $6.5 trillion in 2021.
And the total debt now exceeds GDP by 120%.
Talk about living above your means.
So if the American consumer is stretched but shows no sign of stopping, and the U.S. government is stretched but shows no sign of stopping — where exactly are we heading?
America today looks, worryingly, a lot like America at the start of the 1970s.
Tell me if this sounds familiar…
Energy prices are shooting higher
Inflation is a big problem that's not going away easily
Government spending is running hot to finance military conflicts
Economic growth is weak or patchy
And interest rates are rising fast.
Sounds a lot like the America of today, doesn't it?
Well, it also perfectly describes America of the early 1970s.
History may not repeat, but it often rhymes. So, if we want to get a strong sense of what the rest of the 2020s could look like, we should look closely at what happened back then.
From 1966 to 1982, the Dow Jones Industrial Average went just about nowhere. This chart from Bank of America, annotated by my colleague and TradeSmith analyst Mike Burnick for Nasdaq, shows the chop in full force.
It gets worse, though. When adjusted for inflation, the index lost about 70% of its value.
Is such a thing possible in the 2020s?
If we capture the trade action from near the start of the 2022 bear market to today, and extrapolate it out about six years, it paints a grim picture.
Could your portfolio tolerate something like this happening, with inflation as hot as it is? Probably not.
So, what could you do to mitigate losses like these?
How to Play Defense
Let's assume the worst-case scenario and say that the next eight years will provide close to zero nominal stock market returns. It's not likely, but it's certainly possible.
And let's also assume that inflation stays the same for those next eight years, at the current year-over-year rate of 3.7%. Materially more likely, but also no guarantee — it could run hotter or colder.
That results in, roughly, a 30% loss in the value of your holdings.
That would certainly sting, especially after the bull market we were just spoiled by from 2009 to 2022.
The way I see it, there are two primary defensive measures you can take to mitigate these potential losses, and even thrive, in such a scenario.
Buy great blue-chip, capital-efficient dividend-paying stocks. This is a win-win strategy. By carefully selecting only the stocks that have historically paid and increased their dividend, and are insulated to periods of economic stagflation, you have protection in a lost-decade scenario by way of income and stability.
And if we don't see a lost decade, you stand to profit from growth in a new bull market.
Learn to trade the short-term. As William McCanless showed you on Saturday, learning to trade the market's ups and downs is essential during times of volatility.
A lost decade of stock prices chopping up and down doesn't scare traders — it entices them. Because every one of those up-and-down moves is a chance to draw money from the market.
Especially right now, I would encourage you to learn more about what William is doing in his Trade Cycles research service.
He's already posted an excellent track record of winning trades over the last several months as stocks have fallen.
Back in July, when everyone and their dog was bullish on tech stocks once again, William took the other side of the trade and profited as Nvidia (NVDA), Apple (AAPL), and the broader Nasdaq 100 Index fell.
Keith Kaplan recently published a research report on the Trade Cycles trading algorithm, and the special "Pivot Points" that it's been finding this year. Go right here to check it out.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
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TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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