Time to watch consumption habits

Some refer to it as a bank holiday, in Canada they call it Victoria Day and in the US we celebrate Memorial Day. Regardless of the name, for traders it is a day away from the trading screens and hopefully a time to celebrate and take a road trip with family and friends. If you were lucky enough to do just that, then undoubtedly you took a peak at the local economies. You almost have to since traders could set their watches by the economic releases from around the world.

How were the local economies doing? Are more small businesses starting to reopen again or are they still closing? Were people spending money or just browsing in the shops?

Where I was at there was little doubt on how the local economy was doing. This is normally a popular 3-day weekend destination but this year it seemed as if all the hotels had vacancy signs, with some even advertising ‘off-season rates’. Even the day-trippers seemed to have been staying home as there was no need for a reservation at restaurants. This is just one example, though, and maybe the places that you visited had just the opposite true with big crowds.

Will I use this information when I trade for the remainder of this week? Absolutely not. My trades in GBPUSD or EURJPY that hit the Currensee Market Watch table will not be persuaded by anecdotal evidence. If that were the case then most US traders who have had the chance to travel internationally would be underperforming as a weaker US Dollar has made travelling exponentially more expensive for us.

Then why do I bring this up? Last week the US GDP report was released and showed that Q1 growth came in at +3.0%. Consumption accounted for 70.7% remaining the heavyweight in the economy but it was off the highs of 72% from a few years ago. This was also the first time since Q1 of 2007 that we saw such strong consumption levels. Despite relying more heavily on productivity companies were still able to turn out strong profits. The graph below compares the performance of corporate profits to the Dow Jones on a yr/yr basis.

From 1999 through the first quarter of 2010 you can see that the Dow Jones has been receiving a premium for profits. Currently that is not the case. If the US and global economies are bouncing back from the 2007/8 credit crises and companies are producing profits again, then why haven’t traders and investors fully embraced the risk-on trade. (This graph is pre-European crises, but the argument remains the same.)

My guess is that the high unemployment rates have caused investors to spend less and save more than they otherwise would. The ‘flash crash’ and the European crises are not helping either, but in days past those events would have served as an opportunity to place risk back-on. To be seen if this is just a temporary phenomenon, or a change in attitude on saving and spending in the US.

As you trade and invest in the weeks ahead, you will certainly hear from those arguing that valuations are cheap and now is the time to reinvest. Others will argue that another correction (right shoulder per technicians) is ahead. In the end judging the US consumption patterns may be your best guide.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.

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