For the services industry, travel is one of the hottest categories at the moment.
With the US dollar stronger, and an itch for international travel following past COVID-19 travel restrictions, many Americans are opting for travelling abroad to destinations such
as Europe as opposed to domestic travel, leaving places such as Napa Valley somewhat quieter on the tourist side.
Early signs of weakness are however showing in the bottom tier consumer, who was generally the key beneficiary of excessive stimulus in the past few years. This group is starting to feel the pinch.
What is becoming more evident in this consumer group tier is their extra savings have declined, and even returned to debt levels seen pre-COVID-19. Many consumers from this group have already resumed using credit to supplement their spending.
JPMorgan, an American multinational investment bank which serves over 58 million American households, believes that there is about a 12 month delay before we see this trend feed into the other consumer tiers.
On the positive side, this means we will likely continue to see a good level of spending for the next 12 months.
Is this good news for retailers? Not necessarily. Most retailers are holding an incredible amount of inventory, thanks to the ongoing supply chain challenges. Many of them are holding their breath for strong Black Friday, Cyber Monday and Christmas sales to clear unwanted goods.
As a borderline shopaholic, I will certainly be holding off my spending until then. By the March quarter, we should probably find some of the biggest bargains in goods and retail stocks.
Despite the gloomy homebuilders index in the US, most are seeing continued demand growth and an ever extending pipeline. This is partly due to the supply shortage from a few months back. There is some relief to homebuilders with a sharp fall in materials costs such as lumber, but the problem with labour shortages continues to be a hard one to overcome.
Labour shortages is probably the single most mentioned issue across every industry, with the technology industry being the exception. High single-digit to double-digit increases have been the norm for many industries, with some simply unable to find anyone to fill roles.
To cope with the unprecedented staff shortages, hotels have cut occupancies but increased prices to ensure continued profits. Additionally, some hotel services have also been cut, which I witnessed in several five-star hotels where in-room dining is no longer an option.
Similarly, airlines have cut capacity and increased prices. For shareholders, profit continues to rise with strong margins, but for consumers this means higher prices for less and longer queues.
The tech sector is the only sector that is experiencing over staffing, and cutting down staff numbers after years of excessive hiring and spending without consideration for profitability. Whether this will eventually relieve the pressure on the labour market across the economy is too difficult to gauge at this stage.
Simply put, the most sought after job in the US is in the lower tier rather than the skilled workforce.
The next 12 months
The US economy seems to be doing better than most expected and contradicts what the volatile sharemarket has suggested. The challenge for the US Federal Reserve is that the economy is going a little too well with interest rates now at 3.25 per cent, back to levels last seen in 2008.
It seems there is little to slow down the rate hike cycle before it gets to 4.5 per cent, as expected by the market. This means we will see continued volatility as equity investors try to predict what will happen in 12 months’ time, during this unprecedented inflationary environment.
On the brighter side, we see investment opportunities in abundance. As an active investor, short-term uncertainty creates price dislocation and hence rewards investors that can be agile and active.
Happy stock investing.
Jun Bei Liu is lead portfolio manager of the Tribeca Alpha Plus Fund.