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Thoughts in Charts: Do I Need That?

These two charts aren’t earth-shattering bits of new information; however, they did give me pause. I came across these while reading Jonathan McCarthy’s “Discretionary and Nondiscretionary Services Expenditures during the COVID 19 Recession” post on Liberty Street Economics. McCarthy is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group. Nearly 10 years ago, he published a framework for examining personal consumption expenditures (PCE) and every so often, he applies it to current situations. This January, he was back with insights on the current spending.

 

These charts divide discretionary and nondiscretionary consumer spending. Starting with the bottom chart, nondiscretionary spending in housing, financial services, and health care dropped sharply as the pandemic set in. Based on McCarthy’s data analysis, most of this drop was in health care because elective care was postponed or suspended. As of November, health-care spending had returned to near the pre-pandemic levels as did non-discretionary spending.

 

Discretionary spending, however, has plateaued after a sharp increase in June. Not surprising, the main culprits remain transportation, recreation and food services. These segments of the economy clearly remain under enormous pressure, but the “stall” described by McCarthy is really interesting. As of November, it hasn’t had an upward trajectory. The data from June through November asks us to consider: have consumers reached a comfortable level of non-discretionary spending? What will it take for them to start increasing that spending toward the pre-pandemic level?

 

If COVID has taught us anything, it’s that tomorrow may bring a whole new set of experiences – sometimes challenging, sometimes hopeful, and sometimes inconclusive. While the stock market has soared as of late, clearly for a lot of us, we are still deciding if we are ready to spend on much more than what we absolutely need.

 

McCarthy, Jonathan. “Discretionary and Nondiscretionary Services Expenditures during the COVID-19 Recession.” Liberty Street Economics, 15 January, 2021, https://libertystreeteconomics.newyorkfed.org/2021/01/discretionary-and-nondiscretionary-services-expenditures-during-the-covid-19-recession.html.

 

For disclosures, please click here.

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Thoughts in Charts: Quilting Lessons

My grandmother was a skilled quilter. She and I spent many summers in her sewing room meticulously building these works of art. I often would get so lost in the block-by-block detail, that I’d forget to step back and see what was really being created.

Sometimes I get stuck in the blocks with this chart too. I immediately dive into what segments of the US Markets did the best or the worst during specific periods. I wrote (and deleted) four paragraphs on the nitty gritty of this chart before I remembered my grandmother’s advice to step back.

Big picture, I see is a fairly random quilt. The bottom of the chart is a bit darker, with underpriced value companies toward the bottom but sometimes popping to the top. The lighter blocks, the growth companies, tend toward the top but sometimes fall downward. It’s just two years of information, so the picture is small.

Delving into the details of this chart, you can get trapped into looking for conclusive patterns. It’s tempting to think that if one segment is doing badly, it will pop to the top next quarter, or that a block will continue to stay at the top because it’s been there for several quarters. I often hear pundits articulate their points of view as if they are a foregone conclusion – like they are reading from a clear pattern. This chart, however, illustrates that they are not.

Our job is about probabilities and risks. If anything in our business is actually a certainty, then it has no risk, and therefore, no upside or downside potential. Our job isn’t to know the future. When I step back and look at the entire quilt, I’m reminded that our task is attempting to increase our probability of success while managing the risks that make return possible.

The chart is not only one color and that’s what makes my job interesting. We stay exposed to the pieces or boxes, because we don’t know for certain what order the blocks will fall next quarter. This chart informs decisions, and this chart also reminds us that all portions of the market have good times and bad.

For disclosures, please click here.

Lynch, Katherine. “2020 Market Performance in 7 Charts”, Morningstar. 5 January 2021. https://www.morningstar.com/articles/1016670/2020-market-performance-in-7-charts

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Thoughts in Charts: Office Space

 

Office Uncertainty: it’s a real thing. With so many people working from home, I’d love to see a graph about how much time people have spent wondering if they will ever return to the office. It’s probably up there with the thought time spent how to make sourdough.

Office uncertainty has also led to some discussion about the virus’s impact on the broader real estate market. With people leaving cities, will apartments struggle? Now that companies know we can work from home, will they cut down on the overhead of office space? We learned that everything can be delivered to our door – will we ever go back to shopping in person?

The answers to these questions may not matter as much for publicly traded US Real Estate Investment Trust (REIT) investments as you may think. These investments allow liquid access to real estate exposure, so they are a nice fit for most clients. Like many things, all of the uncertainty around the virus left this investment space pretty banged up, but the above chart challenges the notion that real estate can’t thrive without offices and malls.

A large part of public real estate is now cell phone towers and data centers.  I recently spoke with a fund representative who reminded me that when you order something from your phone, you actually engage three types of real estate: cell phone towers, data centers, and industrial properties. By his measure, that is about 45% of the public REIT universe.

That office space we have been pondering so frequently lately – it makes up about 7% of the public REIT space.

Alright, so about that sourdough…

For disclosures, please click here.

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Thoughts in Charts: The Price of Pie

Back in May, I posted “Thoughts in Charts: The Price of Food” which explored food inflation as a portion of the changes in prices we see in our daily lives. This chart from The Wall Street Journal article “Thanksgiving in a Pandemic Means Smaller Birds, Fewer Leftovers,” puts a Thanksgiving spin on the issue. It reports that the typical price of a Thanksgiving meal will be 3.5% higher this year than last.

Curious, I went back to the US Bureau of Labor Statistics to check on the 12-Month “food at home” category. It turns out that the increase in food prices has actually fallen slightly in the last few months. The food at home year-over year increase peaked at 5.6% in June, and is now down slightly at about 4% as of the end of October.

Economics 101 reminds us that an increase in demand on limited resources increases prices. The Wall Street Journal article reports that grocery stores are stocking Thanksgiving food early this year due to concerns about high demand. With food suppliers already struggling to keep up with demand, there is little incentive for food items to be discounted this season.

In true ThirtyNorth fashion, I’m always challenged to think about money and meaning. With food making up a large portion of most people’s monthly budgets, the charts remind me that donations to charity holiday food drives are even more valuable this year.

Just a little “food for thought” – if you will.

For disclosures, please click here.

 

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Thoughts in Charts: Red or Blue Economy?

As we near some answers about the presidential election, I’m breaking out one of my favorite political prospective charts.

This Pew Research Center survey found that economic perspective varies significantly based on political leanings. The red line scrolls above the blue during a Republican presidency and the blue above the red during the Democratic presidency. We shift our sentiment on election day – prior to new policy implementation.

Our economy has all sorts of hurdles in front of it, but I use this chart to check my own biases. It reminds me that economic prospects may be a bit more middle ground than they feel.

For disclosures, please click here.

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Thoughts in Charts: We Will Pay for This

Source: Congressional Budget Office

This week’s graph is a bit of a bummer, so if you are having a “rainbows and butterflies” type of day, maybe just skip it. The chart is the Congressional Budget Office’s (CBO) projection of the national debt as a percentage of output if we don’t make any changes to current taxes and spending. We are already at World War II levels, and the projected uptick is steep.

There is a solid argument out there that says that the national debt really doesn’t matter that much. I tend to agree with a lot of that – to a point. I also believe that there is a level at which it very much will matter. I buy into the CBO’s statement that:

“High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.” 1

The good news is that this is a ratio. If Gross Domestic Product (the denominator) goes up, then the overall percentage goes down. If we produce more than anticipated, it may not look quite so bad down the road.

Will we reach a point where changes will be required? As I look at this chart’s big picture, I think we will eventually have to face the spending and revenue numerator in this ratio. Yes, I mean changes to both government spending and taxes. I warned you that this wasn’t a feel-good read.

At some point, it seems likely that this level of debt will matter enough that we need to act. That being said, there are a lot of variables at play. If you’d like to dig in and find out what drives this projected ratio, “The 2020 Long-Term Budget Outlook” is very readable – plus, it has a lot of great charts!

For disclosures, please click here.

1 Congressional Budget Office. “The 2020 Long-Term Budget Outlook.” PDF file. September 21, 2020. https://www.cbo.gov/system/files/2020-09/56516-LTBO.pdf

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Where Did It Go?

When special US government programs distribute money to individuals broadly, we often wonder how the money was actually used. It can occur after a natural disaster, and it happened in March with the $2.2 trillion CARES Act stimulus in response to the pandemic.

Federal Reserve Bank of New York economists published in Liberty Street Economics the results of surveys they conducted to answer this very question. You can read the entire report, “How Have Households Used Their Stimulus Payments and How Would They Spend the Next?” Here are the key points:

  • While the payments ($1,200 for qualifying adults and $500 for each child) were a significant boost to the economy, only a small share (29%) was spent by June 2020. The remaining funds were allocated to savings (36%) and paying down debt (35%).
  • Survey results suggest “households expect to consume even smaller shares of a potential second round of stimulus payments, while they expect to use a higher share to pay down their debt”.
  • Across all demographic sectors, an average of 8% of the funds were spent on non-essentials, such as hobbies, leisure or other items not absolutely necessary. This 8% is included in the 29% spent by June 2020, as is 3% which was donated.
  • The same survey found respondents receiving Unemployment Insurance payments during June consumed in approximately the same percentage (28%), but that amounts allocated to savings were less (23%) and a greater amount was used to pay down debt (48%).
  • The New York Fed Survey of Consumer Expectations (SCE) is a nationally representative, internet-based survey of approximately 1,300 U.S. households. The analysis in the post is based on data collected as part of two special surveys on the pandemic fielded in June and August, 2020. In the June survey, 89% of respondents reported that their households had received a stimulus payment.

While the allocation of these payments varies among differing income and age levels, the results speak to the high uncertainty of how long the pandemic will last and the possible economic impact on recipients. Questions abound about how much money will be needed and when. For example, were parents concerned about “holding the spot” with their daycare provider? Was there concern about how long rent forbearance would last? Concern about layoffs this fall?

For a rough validation of the results of the survey, you can consider that the average U.S. FICO credit score increased in July to 711, the highest level in the past 15 years. Consumer debt levels represented by credit card balances have also decreased from $6,934 in January to $6,004 in July.

The average American was likely using sound financial strategy with their stimulus payments. The choice to forego spending where possible, add to cash reserves, and reduce personal debt is a healthy one during uncertain times and should reduce the possible negative economic implications as we work out of this situation.

Suzanne T. Mestayer is managing principal of ThirtyNorth Investments, LLC.

All investment strategies have the potential for profit or loss.

ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

For disclosures, please click here.

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Thoughts in Charts: Vaccine Progress Report

 

There is a chance that the investment world is keeping track of vaccines about as obsessively as health organizations. Along with the physical and mental health implications, the economic stakes of a vaccine are high as well.

As a result, we have seen wonderful graphical vaccine progress reports. This table came across my deck from a Goldman Sachs piece, and I found it very informative.

I do love when there is a lot of information in a nice tidy visual!

For disclosures, please click here.

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Thoughts in Charts: How long do you have?

At a firm where one of our key investment principles is that “time matters”, I love a chart that show why we value it. Before I dig in though, let me say loud and clear that past performance does not guarantee future results. I use history to teach me, but I don’t count on it repeating itself.

I’ve told you before that I’m a skeptic by nature, so I’m going to start by focusing on the bottom of each range. These are the worst 1, 5, 10, and 20-year-end returns from 1950-2019. It’s the historical worst-case return.

The first thing that jumps out is that a single year downside in a diversified stock portfolio has been as bad as -39%. Got it. In a single year, it can be bad – really, really bad; however, there has historically been enough good that the 5-year worst return is much less negative at -3%. That is significantly better, but let’s be real, if I lose 3% over 5 years, I’m a little frustrated. Frankly, if I have been in the market for 10 years, and I lose 1%, I’m still frustrated.

Here’s how time matters: if I coached myself to stay steady through some of those frustrating 5 and 10 year periods, the 20-year stock portfolio would have resulted in the most beneficial range of returns for my long-term goals. A stock portfolio’s worst 20-year return over the last 69 years was positive 6% – better than a bond portfolio or a 50% bond and 50% stock portfolio. On top of that, it also had the larger upside periods.

Let’s take a step back and look at the blue bars representing a diversified bond portfolio and the grey bar representing a portfolio that is 50% stock and 50% bond. It’s clear that the bond portfolio can act as a ballast. For the end of each year over the 69-year period, a 50% bond portfolio never had a negative worst-case return in a period longer than 5 years.

If you are still tracking with me, I’m going to give you my favorite nugget from this chart. The best 10-year returns on a 50% stock 50% bond portfolio are the same as a bond portfolio, but their worst case is better! I tend to think about bonds helping to limit losses, but in the 10-year time periods, including stocks in the portfolio actually limited downside as well.

Time does matter.

For disclosures, please click here.

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Choosing the Right Financial Road

When you don’t know where you are going, any road will get you there.  – Lewis Carroll.

This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going

In her recent CityBusiness article, Suzanne outlines 3 tips to choosing the road for your financial future. Click here to read more.

For disclosures, please click here.

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