American Consumer, Meet Brick Wall

By TradeSmith Research Team

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Editor’s Note: Today, we welcome a new writer to TradeSmith Daily, Michael Salvatore.

Michael is an industry veteran who’s written about all aspects of longer-term investing and short-term stock trading. He’s one of those guys who “lives and breathes” the markets and is passionate about educating folks on the best ways to make money if the market is up, down, or sideways.

Our goals at TradeSmith Daily remain the same: To make sure our readers are some of the best-informed people in the financial world. To alert you to massive business trends and big dangers in the market. And to make sure we show you the best ways to take advantage of those conditions with our software and newsletter subscriptions.

I know you’ll find Michael’s writing engaging and educational.

Luis Hernandez
Editor in Chief, TradeSmith

Today, millions of Americans face a new kind of “Black Monday.”

And even if you’re not one of them, your portfolio will likely feel the effects…

You see, October 1 marks the first day in almost four years that student loan borrowers will have to resume paying their debt.

It also represents a solid brick wall that the as-yet-stubbornly-resilient American consumer is smashing straight into

Chew on some numbers with me.

There were over 45 million individual student loan borrowers as of Q1 2023. (That’s like combining the populations of Pennsylvania, New Jersey, and New York into one big debtor mega-state.)

And per research from the Federal Reserve Bank of New York, the average monthly student loan payment is about $393.

Doing some quick math… That’s nearly $18 billion in wealth being sucked out of the economy and into debt servicing, every single month.

Why is this so important?

Because even before student loan payments came back online, the American consumer was ready to tap out.

Federal Reserve data shows the personal saving rate is at its lowest level since 2009, the depths of the Great Financial Crisis. Americans are saving a mere 3.5% of their income. (And that’s the official numbers… which, according to the Bureau of Economic Analysis, were overreported by a trillion dollars.)

At the same time, credit card balances are at all-time highs – a cool triple from the GFC days…

And credit card defaults are rising at the fastest pace since… once again, the GFC.

(Granted, the charge-off rate is at a 30-year low. But this looks like it could be the beginning of a powerful and painful uptrend)

Oh and… don’t forget about the small matter of an almost guaranteed government shutdown, furloughing millions of federal workers – maybe for days, maybe for weeks! (Note, this essay was drafted on Friday, September 29.)

Or the United Auto Workers strike, itself threatening to eliminate the 1.5% of GDP that comes from our domestic vehicle manufacturing each year.

But the worst part of all this? The timing…

Market watchers are expecting a stock market rebound in Q4, and they may well be right. Seasonal trends in stock prices strongly support that.

We’re also about to enter the holiday season, a period of typically strong spending. But with the American consumer so pinched… with $44 billion of their wealth busy making debt payments from now until 2024… will they spend big on Christmas?

As investors, we must keep a close eye on the companies that stand to feel the brunt of this potential head-on impact. Especially if we get that long-predicted recession next year.

You know we have you covered here at TradeSmith. We have a whole suite of investment tools designed to help you monitor any stock in the market.

So today, let’s use our software to take a closer look at a few stocks you’ll want to watch closely this holiday season…

3 Stocks to Watch as Consumers Struggle

Now, I need you to keep something important in mind.

The stocks I’m about to talk about could do quite well as investors look to leverage the seasonal Q4 rally. These are not names you want to consider selling right this second.

However, if American consumers don’t show up in droves for Black Friday/Cyber Monday this year, these stocks could take a major hit…

1. Amazon (AMZN) – Amazon is the granddaddy of ecommerce businesses. Despite not having a storefront, it’s the second-largest retailer in the United States.

I don’t know about you, but Amazon has become second nature to me as a consumer. When I’m buying anything, even things I know I could get from the mom-and-pop shop down the corner for a dollar more, I first look at Amazon.

That’s the story for the hundreds of millions that shop on Amazon… not to mention the 200 million who cough up $139 each year for its Prime membership.

But Amazon’s great size is part of the problem. With the American consumer so stretched, Amazon’s hundreds of millions of users may look to spend less during the holidays. That could cost the company a big chunk of change… and cause disappointment in their Q1 earnings report, slated for around February of 2024.

But what does TradeSmith’s suite of investing tools say about Amazon right now? Let’s take a look…

As of now, Amazon rates a Strong Bullish 79 on TradeSmith’s proprietary Stock Analyzer – indicating an incredibly good, if not perfect, investment opportunity.

Its Business Quality score also rates a strong 86.

And it earns a Volatility Quotient of 28%, indicating a medium level of risk.

These are all solid numbers considering the stock just fell 14% in August and September. But we should keep a close eye on any signs this could change.

2. Walmart (WMT) – Amazon may be the king of ecommerce, but it’s responsible for less than half the sales of America’s biggest brick-and-mortar retailer, Walmart.

Walmart actually presents a mixed bag for this thesis. On one hand, since Walmart’s $500 billion in retail sales in 2022 was the highest in the country, slower holiday sales will eat into their earnings more than any other company.

But on the other, Walmart attracts frugal shoppers with its “everyday low prices”… and could actually stand to benefit as the American consumer is spread thin.

Walmart even saw an influx of wealthy shoppers while inflation was peaking in 2022, as higher prices forced all consumers to scrounge for deals.

This makes Walmart an attractive investment in virtually any environment. But should a recession come knocking in Q1 of 2024 or even Q4 of this year, Walmart will need to find a way to keep shoppers coming through a tight holiday season.

Walmart currently rates a 73 Strong Bullish on the Stock Analyzer…

With an exemplary Business Quality Score of 94…

And a low-risk Volatility Quotient of just 14%!

These are all strong numbers, making WMT a great potential buy now… and also one to keep an eye on as a kind of “consumer safe haven” play.

3. Etsy (ETSY) – Of all the stocks we’re covering today, Etsy is the one I’m most worried about post-holiday season.

Etsy offers handcrafted, premium items from small business owners. Etsy’s products make great gifts… if you have the money to pony up for them.

But a customized butcher’s block cutting board or an engraved piece of boho diamond jewelry are not the type of thing people splurge on when money is tight. And with Etsy being a specialty goods retailer, it’s not like it has any need-to-have products to keep it propped up through a tough time.

And it’s a smaller company – not small, by any means, at a $6 billion market cap… but smaller than Amazon and Walmart – which tend to get hit hard during recessions.

On the Stock Analyzer, ETSY currently gets a Bullish stock rating of 39…

And a neutral Business Quality Score of 50…

But also a Volatility Quotient of 50% – indicating a Sky-High level of risk.

That makes ETSY a high-risk stock to own now… and one to watch closely in the coming months.