“The Shape I’m In” by The Band

This 1970 classic by The Band is about conditions not being how they appear on the surface. The character in the song implies that the shape of his life is worse than it appears to others. Given the recent bull run in the stock market in the face of a wall of worries, we address the question in this song of the week (SOTW). 

What is the shape of the US Economy?

With so many crying for a recession and large stock market decline, we look under the hood to determine if there is something others are not seeing. Does the stock market reflect the condition of the companies in the index?

"Out of nine lives I spent seven

Now, how in the world do you get to Heaven?

Oh, you don't know the shape I'm in"

While investing is not easy, we try to make complex subjects simple in the SOTW. The US economy is 70% consumer spending—US citizens are the economy. So, we start with looking at signs the consumer is doing well.  

First, the consumer needs a job. US unemployment is at one of the lowest points in history. According to a May 2023 report from the Bureau of Labor Statistics, nearly 97% of Americans have jobs. This stat is great news and it beat market estimates—market estimates had non-farm payrolls increasing by 190,000 jobs, but the actual number ended up hitting 339,000. This low unemployment rate means more consumers can participate in the economy.

Second, does the consumer with a job have adequate wages? In other words, does the salary constitute a livable wage that can also cover the consumer’s basket of goods and services? As of May, average hourly earnings rose .3% to $33.44 for employees on private nonfarm payrolls, and .5% to $28.75 for private-sector production and nonsupervisory employees. For those childless consumers that earn these average hourly rates, their earnings constitute a livable wage for America, according to data from MIT’s Living Wage Calculator. While the livable wage needed is higher for those with children, the upward trend of average hourly earnings is a positive sign. 

Third, is the consumer spending these wages? It appears so, even if only modestly and in the face of inflation. According to the Bureau of Economic Analysis, personal consumption expenditures increased .8% from February to April 2023, likely driven by the .4% increase in average personal income and the .4% increase in disposable personal income.

Fourth, does the consumer have savings? They do, and while it dipped to 4.1% in April from 5.1% in March, it has been trending up over the past year, a great signal for long-term economic health.

All of this being said, it’s clear that the most important part of the economy is healthy, but what about the valuation of stocks?

What is the Shape of Stock Valuations?

The S&P 500 is the industry standard more measuring performance and valuation of the US stock market. However, over the past decade, the index has become increasingly weighted toward a few mega-large technology companies—Apple, Amazon, Microsoft, Alphabet, Nvidia, and Tesla. While the index has 500 stocks, these few companies dominate the metrics. 2023 has been one of funkiest markets in history due to the oversized weighting of these select stocks.

If the technology stocks are removed from the index, the performance and the valuation picture is very different than the index appears on the surface. The conclusion, there are still many opportunities to find stocks trading at attractive valuations in the sea of 500 US stocks. 

In Summary

The shape of the US economy is strong based on the US consumer. There are certainly areas of concern, and we are not suggesting it is smooth sailing for the US economy from here. Higher interest rates will have an impact on consumer spending. However, today, right now, there does not appear to be something under the surface. Further, while S&P 500 has moved higher on the back of a few technology stocks, there are still hundreds of attractive opportunities hidden under the surface.

So, unlike the song, there doesn’t appear to be glaring problems with the shape we’re in. 

Happy 4th of July.