Posted September 15, 2023
By Zach Scheidt
A Tale of Two U.S. Economies
This week, I got the chance to catch up with my colleague J-Rod for our monthly Lifetime Income Report Pro State of the Market call.
On the call, we discussed the growing divide in the U.S. economy between affluent and low-income consumers.
And we explained how this is playing out in the stock market, leading to incredibly different results for retailers depending on which consumer they cater to.
I’m excited to share a portion of our conversation with you today. Click on the video below to watch a clip from our call.
Another area that I'm watching very closely is retail stocks, where there's a major bifurcation going on right now.
There's a big difference between companies that sell to affluent consumers and companies that sell to lower-income households on a budget.
Because of inflation, lower-income families are struggling to make ends meet. As a result, retailers that cater to these consumers are in trouble.
Meanwhile, retailers that cater to more affluent consumers are doing just fine, because these customers aren’t suffering financially. And there are two big reasons for that.
First, stocks are in a bull market. The market is rebounding this year, and affluent customers are the ones who are more likely to have investments in a 401(k) or IRA.
They're more likely to have a brokerage account where they're making money as stocks move higher.
Affluent customers are also more likely to own homes. And the real estate market has held up really well.
That's because people aren’t selling their homes with today’s high interest rates. So there's less inventory on the market, which naturally pushes home prices higher.
Consumers who own their homes are sitting there and looking on Zillow seeing the value of their homes moving higher.
Now that doesn't just add cash to their accounts that they can spend, but it does make them feel more confident that they've got wealth building in their home.
So they’re more comfortable spending their money. And stocks that cater to these affluent consumers are doing quite well.
On the other hand, lower-income consumers are being challenged by inflation. And there are two areas of inflation that are hitting this group of consumers very hard.
The first is housing. It costs more for a mortgage payment if you own a home, and rent prices are still very high for renters.
And then the second area is gas prices. It’s a very small percentage of an affluent consumer’s expenses, but gas is a large part of what most other families spend money on.
When you have a 10% month-over-month increase in gasoline, it means that you don't have as much money left over to spend on other things. So that’s a big issue for these customers.
I'll also note that we've seen statistics showing rising credit card delinquencies. So we're already seeing this stress impact an average family's ability to pay for their day-to-day expenses.
And these consumers have already spent down a large part of their excess savings that accumulated during the pandemic.
Another thing for retailers that sell to lower-income families is that we've seen theft as a major issue, which is cutting into their bottom line.
When individuals are struggling, it's easier for them to justify theft. But it’s not just individuals driving the uptick in theft these days. There's also organized crime.
People know that if they steal less than a certain amount in a certain municipality, they won't be prosecuted. So those laws are actually encouraging more theft at some of these stores.
Bottom line, a growing class divide in the U.S. economy is leading to an interesting split among retailers. So make sure you’re investing accordingly.