US consumers have spent all of their excess savings from the pandemic, according to a note by JPMorgan’s Marko Kolanovic. This depletion of savings is one factor contributing to the declining stock market. Along with this, Kolanovic warns of other concerning trends, including deteriorating profit margins, high interest rates, and less incentive for stock buyback programs. This article will delve into the details provided in the note and explore the potential implications for the US economy.
US consumers have spent all of their excess savings from the pandemic, says JPMorgan
According to JPMorgan, US households have spent their entire excess savings of over $2 trillion accumulated during the pandemic. This has already had an impact on consumer spending, which could further soften as student loan payments are set to restart in October. The bank notes that the estimate of excess savings when adjusted for inflation is now fully exhausted, and there is a risk of a widening imbalance if outlays accelerate. This indicates that the tailwind provided by excess savings is over, signaling potential challenges for consumer spending in the future.
Consumer spending could soften further as student loan payments restart in October
As student loan payments are slated to restart in October, consumer spending could face additional headwinds. Many individuals will have to allocate a portion of their income towards loan repayment, potentially leaving less disposable income for other expenses. This could further dampen consumer spending, contributing to a softening economy. The impact on lower-income cohorts is expected to be more significant, as they have fewer offsets and are already facing challenges from the high cost of capital environment.
JPMorgan’s Marko Kolanovic warns of deteriorating profit margins and high interest rates
In addition to the depletion of excess savings, JPMorgan’s Kolanovic highlights deteriorating profit margins and high interest rates as concerns for the stock market. The effects of monetary policy on demand are expected to result in ongoing pressure on profit margins, as companies resort to promotions and incentives to stimulate demand. This erosion of pricing power, combined with rising labor costs and interest expenses, is likely to continue to put pressure on profit margins.
Excess liquidity at risk of being fully depleted by May 2024, according to Kolanovic
While there are still elevated levels of household liquidity across cash assets, estimated at $1.4 trillion when adjusted for inflation, Kolanovic warns that this excess liquidity is also at risk of being fully depleted by May 2024. The concern is whether this excess liquidity can support above-trend consumption for that long, given the challenging economic factors. Kolanovic emphasizes that lower-income cohorts are increasingly coming under pressure without sufficient offsets, and there is little relief from the high cost of capital environment.
Kolanovic highlights China and Germany as countries at risk of recession
Beyond the US, Kolanovic highlights China and Germany as countries at risk of an imminent recession. These economic downturns in major economies could have a ripple effect globally and further impact the stock market. JPMorgan still expects the US to enter a recession sometime in early 2024, adding to the concerns of a declining stock market.
The depletion of excess savings, softening consumer spending, deteriorating profit margins, high interest rates, and the risk of a recession in major economies all contribute to a cautious outlook for the stock market. JPMorgan’s Marko Kolanovic warns of potential challenges ahead and expects the S&P 500 to finish the year with a downside of about 4%. These factors highlight the need for vigilance and careful monitoring of the economic landscape in the months to come.
Analyst comment
Negative news: The depletion of excess savings, softening consumer spending, deteriorating profit margins, high interest rates, and the risk of a recession in major economies raise concerns for the stock market. JPMorgan’s Marko Kolanovic expects the S&P 500 to finish the year with a downside of about 4%. Vigilance and careful monitoring of the economic landscape are advised.
