Lascelles’ picture is not entirely gloomy. He notes that employment data has been strong and wage growth has largely outpaced inflation. That means real purchasing power is rising. Nevertheless, interest rate sensitivity in Canada means rate hikes have pulled money out of consumers’ pockets as they manage higher mortgage payments. The wealth accumulated by consumers during the pandemic, too, has also been diminished significantly — if not totally spent. Finally, US student debt repayments began again on October 1st, meaning around 43 million Americans are now spending hundreds of dollars per month on debt repayment again.
All these trends have informed a softer outlook for consumer spending. Retail sales in Canada, Lascelles notes, have fallen and are now tracking flat which — given population growth and inflation — means on a per capita basis Canadians are purchasing less. In the US, credit card spending has jumped along with delinquency rates, which Lascelles describes as a “canary in the coal mine” for a struggling US consumer. Lascelles also notes that retailers may be predicting a weaker holiday season already, as many haven’t pursued the same seasonal hiring policies they’ve pursued in previous years.
But what does a weaker consumer mean for investors in Q4? Looking at historic US data, Lascelles notes that December retail sales are around 15% more than average, typically. He remarks that he actually expected a higher number in December but speculates that analysts may still perceive a greater importance in retail numbers from Q4 overall.
As they anticipate a recession and read data about consumer weakness, Lascelles says the team at RBC GAM is reducing risk in their portfolios. They’ve holding an overweight in fixed income and an underweight in equities with a view that there could be weakness ahead. Lascelles believes that markets are now predicting a soft landing, but if we see this weakness in consumer spending manifest meaningfully over the holidays there could be a correction on the market. Consumer discretionary stocks, he says, would be among the highest risk subsectors in this scenario.
As advisors look closely at this level of consumer weakness and prepare their clients’ portfolios, Lascelles believes that they should be ready for a changing narrative, one where consumer resilience gives way to struggle.
