Stressed U.S. consumers, labor shortages, copper, and buybacks


Each month we speak with the analysts on our team and asked which macro trends are top of mind for them as they think about the investment landscape. They’ve explained their responses below. First, we explore how persistent inflation and high interest rates seem to be affecting American consumers and how the global birth rate could impact our future labor force. Then, we’ll address the excitement around copper and some (we think) exciting activity in corporate buybacks. Investors should keep both sides of the coin in mind as they make decisions in today’s economic environment.

Cracks in the U.S. consumer amid sticky inflation

It is widely known that U.S. economic growth is largely driven by consumer spending, which comprises close to 70% of GDP. While overall spending and consumer sentiment were quite strong through 2023, a period when many economists had predicted a slowdown, defying sticky and elevated inflation. However, recent economic data and quarterly retail earnings are highlighting a frustrated consumer. The stress of higher prices, persistent inflation, and high interest rates appears to finally be cracking American consumers.

Housing costs are one major factor that has kept inflation sticky, impeding the Fed’s ability to cut interested rates, and weighing heavily on consumers. Housing comprises roughly 32% of the consumer price index (CPI) and roughly 15% of the personal consumption expenditures price index (PCE), the latter being the Fed’s preferred reading. Housing costs are coming down, just much slower than many have anticipated, from a high of 8.2% a year ago to 5.5% in April.

Inflation’s impact on the consumer is hitting overall economic growth. First quarter GDP showed an annualized increase of 1.3%, which is down from the 2.5% growth recorded for 2023, and personal consumption declined to an increase of 2.0%, from levels of 3.3% in Q4-2023 and 3.1% in Q3-2023. The University of Michigan’s preliminary reading on consumer sentiment was 67.4 in May, the lowest level since November. Households highlighted concerns of higher cost of living as well as unemployment.1,2

Retailers reporting Q1 earnings have also focused on consumer weakness, with several noting they see consumers delaying purchases or being more careful how they are spending, especially for big-ticket items like furniture, electronics, pools, and mattresses. Executives from McDonald’s (MCD), Coca-Cola (KO), Costco (COST), and 3M (MMM) highlighted consumers being under heightened spending pressure, with each of the companies focused on reaching them with value-focused lower priced items.3,4

Consumers hindered by increased housing costs and sticky inflation are driving weaker than expected economic growth. While corporations are seeking out retail solutions it may take lower interest rates and a decline in housing costs to bring the consumer back and keep GDP growth positive.

By: Tim Murphy, Vice President, Senior Portfolio Manager & Brandon Rick, Investment Analyst - Equity Research

Declining births, rising labor shortage

Total births in the U.S. fell to 3.59 million, a level not seen since 1979. This notable decline is likely to have severe long-term repercussions for future labor force demographics and highlights a monumental shift in societal preferences as individuals become more selective about how they want to live their lives. Some view this change caused by a heightened focus on individualism that puts less emphasis on parenthood and marriage, and an increasing number of women in the workforce. However, possibly the most notable driver of this demographic shift is the rising cost of living. Research conducted by the University of North Carolina shows that economic strains, work instability, political polarization, student loans, access to health care, climate change, and global conflicts are reasons to delay or not have children.5

Since 2007, the total birth rate in the U.S. has remained below the level of replacement, meaning that the nation would require immigration to sustain its current population. However, this decline in birth rates is a worldwide issue, primarily seen across wealthier nations but also within nations that historically had been immune to fertility declines. Globally, data shows that we are extremely close or below the global replacement rate for the first time in history.

Nations around the world are trying different methods to boost birth rates as the economic implications due to labor shortages continue to intensify. According to a demographer at Hedgeye Risk Management, this worsening demographic situation could make this a second consecutive “lost decade” for global economic growth.6

By: Ling-Wei Hew, CFA, Principal Director – Multi-Asset Research

Copper rush

Over the first five months of the year, copper has seen steady buying pressure, pushing the price of this important metal up 20%, reaching all-time highs. Copper is a main part in numerous technologies such as electric cars, energy transmission, and artificial intelligence. The highly sought after metal has created an international frenzy, as companies and nations around the world are looking to acquire both the metal and mines. Further adding to the copper rush is the fact that some mines are closing or scaling back production, while at the same time there is a lack of new mine development, with new mines taking upwards of 15 years before usable copper is produced.

At the center of this copper rush is the company Anglo American, one of the major copper producers in the world. The company is undergoing financial difficulty, and there are several would-be suiters making a play for the company’s copper mines. Most recently BHP’s $43 billion takeover offer was rejected, as Anglo American made the decision to refocus on copper production and sell its platinum, diamond, and steelmaking businesses.7,8

From the U.S. government’s perspective, the objective is to keep major copper assets out of the hands of China, a nation which has been rapidly acquiring the metal, spending $19 billion on purchases and mining investments in the last year alone, a year over year increase of 158%, and the highest level since 2013. While the U.S. governments is limited in its ability invest in copper production, leaders of the State Department have been meeting with copper rich nations in Africa and U.S. investors in an effort to secure copper supply for US demand. To that end the U.S. has committed more than $1 billion to sub-Saharan countries in order to develop clean energy and railroad transportation, connecting Angola, Congo, and Zambia.

The ongoing trend of electrification is increasing the demand for copper, as companies and nations jockey to secure copper assets. The resulting frenzy has caused the metal to trade at record high prices, with many expecting the demand to remain high for the foreseeable future.

By: Scott Keller, Portfolio Manager

Buybacks are roaring back

Buybacks are roaring back so far in 2024 after falling 14% in 2023. In the first quarter, S&P 500 companies completed $181.2 billion share buybacks, a 16% jump from 1Q/2023. For the year, Goldman Sachs expected the total buybacks to reach $925 billion, a 13% rebound from 2023.9 Buybacks and dividends are two ways for companies to return cash to shareholders. Buybacks reduce total share outstanding, making remaining shares more valuable. Buybacks are superior to dividends in many fronts, in our opinion.

First, it is more tax friendly to shareholders. While companies have to pay 1% in tax starting 2023, buybacks remain tax free for shareholders while taxable investors have to pay tax in receiving dividends. Second, buybacks are far more flexible than dividends for companies in managing their finance. While not legally binding like bond coupon payments, companies rarely reduce or suspend their dividends even when they need to preserve cash, as reducing/suspending dividends is regarded a sign of secular/structural decline in company fundamentals that will damage company stock prices and valuations severely. Buybacks, however, are far more flexible as investors treat them as commitment rather than obligation and are far more tolerant if companies change their buyback plans when they have better use of their cash. Lastly, buybacks are a good way for company management to maintain discipline in corporate finance. When there are no good capex or M&A opportunities, it is better to return excess cash to shareholders than invest in subpar projects that will potentially hurt shareholder value.

More and more companies are embracing buybacks. According to Birinyi Associates, among the S&P 500 companies, 443 companies have announced a buyback plan this year, up from 378 a year earlier.

By: Frank Wei, CFA, CAIA, Senior Investment Analyst - Alternatives Research

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1Reuters: U.S. Consumer Sentiment Slides to Six-Month Low in May

2Wall Street Journal: Fed Inflation Rate and Housing Rentals

3CNBC: Companies from McDonald's to 3M Warn Inflation is Squeezing Consumers

4CNBC: Some Consumers Are Punting Big Purchases Like Pools and Mattresses

5Bloomberg: U.S. Births Fell Last Year to Lowest Total Since 1979, Report Says

6Wall Street Journal: Birthrates Global Decline Cause

7Wall Street Journal: Why the World Has Gone Cuckoo for Copper

8Wall Street Journal: Why Copper is the Metal of the Moment

9Wall Street Journal: Stock Buyback in Big Tech