By John Grace
Contributing Columnist
Consumer confidence is higher than ever, which is not good news for stocks.
Higher consumer confidence is often a contrarian indicator. When consumers are as confident as they indicate today, “they may have already maxed out their discretionary expenditures like trading up homes, furnishings, and cars, etc.,” says Harry Dent.
“Since March 2022, the Fed has tightened policy the most since 1980-81, and it remains restrictive, raising the cost of borrowing. Hence, this is the perfect time to see a new term,” Dent coined, “the exhaustion of demand!”
Investors must remember that when markets experience prolonged growth, it’s easy to become complacent and unprepared for significant losses. That is why it is crucial to proactively prepare exit strategies, ensuring you’re in control even in the face of potential downturns.
One of the economy’s most potent engines may be at risk.
That’s because baby boomers, America’s second-largest and most affluent generation, could abruptly dial back their spending at the first sign of economic or market turmoil, according to Brij Khurana, a fixed income portfolio manager at Wellington Management, as reported by Market Insider.
The wealth of the boomer generation, largely tied up in stocks and residential homes, presents an often overlooked risk to the economy. Swings in these markets could have a dramatic impact, potentially leading to a significant reduction in spending if even a mild correction occurs.
The potential for a significant reduction in spending should be a cause for concern and a strong motivator for investors to act. It’s your responsibility as an investor to be prepared for such scenarios by establishing personalized exit strategies.
While there is no one size fits all, investors appreciate it when their funds are moved from risk assets into money markets like 2008 and 2022. They may be better prepared for the next time. Whenever that might be.
Remember the two 50% stock market losses in the same decade, the dot-com bubble burst in 2000 and the financial crisis in 2008? What was good for investors when making deposits to their retirement accounts becomes awful when taking withdrawals, particularly when the withdrawals are from traditional retirement accounts, where the rate must increase every year, no matter what the market does or how the economy turns.
Did anyone suggest to you in the mid-2000s that residential real estate might decline by 30% to 40%? If you weren’t ready for that debacle, how are you prepared for the next downturn, which may take longer to recover now that you are 18 years older?
Thanks to stocks and housing, boomers are the wealthiest generation, which puts them at a significant risk to economic stability when they rein in spending, kicking out critical support under the economy.
“The generation is already flashing early signs that their spending power is starting to wane,” Market Insider reported. “Despite shelling out on travel in recent years, just 19% of baby boomers said they planned to splurge in 2024, according to a McKinsey & Company survey, lower than the average 38% recorded across all generations.”
It would not be surprising to see consumer demand weaken early next year or by something we still need to see on the horizon. This is another reason for investors to establish personalized exit strategies.
A weak Christmas spending pattern or the first quarter may be the first sign of a larger economic downturn, making it crucial for investors to act before it’s too late.
Housing and equity prices marched to record highs in the years since the pandemic, but commentators, including Khurana, think a correction in both markets could be imminent. This potential correction is a stark reminder of the need for caution and preparedness in the current market climate.
John Hussman, one of the market’s most bearish forecasters, estimated that stocks could have as much as a 70% downside. In a recent note, he said that according to one indicator tracked by his firm, the market looks to be the most overvalued since 1929. Home prices, meanwhile, are already starting to drop in critical metros that boomed during the pandemic, like cities in Florida and Texas. Home price cuts jumped to their highest level in over five years in August, according to a Realtor.com report, via Market Insider.
There are several reasons here to encourage investors to establish personalized exit strategies before the grits hit the pan. Taking responsibility for your investments and proactively planning for potential downturns is a key part of successful investing.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here are for general information only and are not intended to provide specific advice or recommendations for any individual.
LIFTOUT
The potential for a significant reduction in spending should be a cause for concern and a strong motivator for investors to act.
