Flailing Consumer Demand Should Be the Focus, Not Rate Cuts
Fading consumer demand is not something the market seems to care about right now as the focus remains on rate cuts.
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Markets shot ahead on Tuesday following a better-than-expected July PPI report. Increasing hopes for cuts to the federal funds rate is the main driver of the market right now as equities have had their best four-day rally of 2024. The massive surge of volatility that pushed the VIX briefly past the 60 level early last Monday for the first time since the COVID-19 pandemic washed up on our shores more than four years ago has already been forgotten. The market seems to have the attention span of my Golden Retriever, Mateo, at the moment.
Home Depot HD warned again about weakening consumer demand with its second quarter earnings report on Tuesday. The company also lowered forward guidance. It was a déjà vu moment as the company did the same with its first quarter report, and then stepped over that bar easily in Q2 after it was lowered. This "analyst two-step" strategy seems to be working for the home improvement giant as its stock gained four bucks a share in trading yesterday despite reduced guidance.
Home Depot is hardly the only retailer facing challenges from a consumer that is under increasing pressure. LL Flooring Holdings, Inc. LL entered Chapter 11 bankruptcy this week and will close 94 of just less than its 400 stores as it tries to restructure. The chain was a victim of inflation, pandemic-related supply chain challenges, a tepid housing sector and a generally poor retailing environment. Last week, Italian restaurant chain Buca di Beppo announced it was filing for bankruptcy and will restructure to try to save its 44 stores remaining after recently closing 13 locations. Management blamed "rising costs" and "hiring difficulties" for proceeding into default.
Here in Delray Beach, at least half of a dozen restaurants near me have closed since the beginning of the year. This is a significant chunk, given the size of this enclave. Small businesses in general are more than challenged by the current economic environment. According to the most recent ADP report, small businesses with 20 to 49 employees have shed a net 88,000 jobs over the past year. In fact, businesses other than the very largest have all cut positions over the most recent 12 months.
Slackening consumer demand is hurting many sectors of the economy. Auto inventories at the start of July were up 52% on a year-over-year basis to some 2.91 million vehicles. Not surprisingly, incentive costs are at their highest levels in 2024. This should hurt automakers’ margins in the coming months.
The trend of consumers pulling back is quite prominent in the restaurant sector. McDonalds MCD missed top- and bottom-line expectations yet again when it posted Q2 numbers at the end of July. Mickey D’s, Burger King and Kentucky Fried Chicken recently brought back their value meal options to much fanfare in a focused attempt to improve tepid foot traffic at their stores. Brinker International, Inc. EAT reported its second quarter results early this morning. The numbers were not pretty as the owner of Chili’s missed both earnings and sales expectations. The stock is being pummeled in the pre-market.
So, while investors are laser focused on seeing the Federal Reserve cut rates to boost the markets, I am focused on the status of the consumer. And right now, the situation here continues to deteriorate.
At the time of publication, Jensen had no positions in any securities mentioned.
