In February of this year, a group of journalists at the Wall Street Journal posited that what we were experiencing with markets having fallen for most of the second half of last year was something they termed a “richcession,” where wealthy people were getting squeezed but lower income households were doing just fine. That idea caught on in some circles, but it always felt a bit like the whining of privileged people who felt that reduced inequality was unjust and that they were somehow its victims. Seemingly conflicting reports from two companies this morning, however, suggest that the concept of a 'richcession' was simply not true, or if it were true in February, it was extremely short-lived. That has implications for investors.
Harry Truman once famously asked that someone find him a one-handed economist, having become tired of economists saying "...on the other hand." That frustration is understandable to anybody who has ever heard an economist analyze data and attempt to make a prediction, but there are times when the only honest answer to the question “What's going to happen next?” is “I don’t know,” no matter how smart or well-educated the answerer may be. That is something that market analysts share with economists, and the current situation is a case in point.
This morning, traders and investors woke up to two amendments to forward guidance from two well-known companies, and the message they sent about the economy and the consumer could not have been more different. Delta Air Lines (DAL) raised their guidance for the quarter, saying they expect to have the most profitable quarter in their history, while the drug store company Walgreens Boots Alliance (WBA) cut their revenue forecast for the same period. You might think that a look at the details of those announcements would reveal some company-specific reasons for that and thus explain the contradictory message about the consumer. You would be wrong.
Delta reported there is strong demand for travel, but they also said that 35% of their revenue was coming from premium seating, the system now in place that makes it seem that you have to pay extra for a seat that is not next to the toilet or with limited legroom, indicating that their customers are willing to pay up for anything beyond the most basic ticket. They also said that other premium tickets, business and first class, are seeing strong demand. Walgreens, on the other hand, (there’s that phrase again!) missed on earnings and cut their forecast due in part, they said, to consumers simply spending less.
So, which is it? Are consumers flush enough to not just spend on travel, but also to pay for upgrades when they do, or are they feeling the pinch, unable or unwilling to spend on the kind of essential items that drugstores typically sell? The logical conclusion is that it is both, and the implications of that puts speaks to the notion of a 'richcession.' It means that order has been restored, and those wealthy enough to jet off around the world are doing fine and businesses are still spending freely. But those whose paycheck goes on basic items are struggling.
That matters to those who believe that a conventional recession is coming. Traditionally, preparing your portfolio for a recession means buying things like consumer staples and cutting back on industries that cater to higher-end tastes. However, it seems that right now we are experiencing the opposite of a richcession, where the wealthy and high earners, including businesses, are spending and those less well off are cutting back.
That doesn’t mean that recession isn’t coming. Cutbacks at the lower end of the pay scale tend to “trickle up” and impact businesses and the better off eventually. For now, though, the pain is being felt at the lower end of the pay scale. Consumer staples are therefore not the place to be, and the kind of technology stocks that sell to businesses and appeal to wealthy investors, and that have done well over recent months, can continue to outperform, at least for a while.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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