Many Deadheads aren't very fond of the song “Truckin’” because the 1970 hit was one of the few tunes by the band to reach the Billboard popular music charts. Popularity was never the goal of the band, or their fans. In fact, the attention of a mainstream audience was almost sacrilegious to the counterculture movement. However, we have a favorable view of the song because it brought a taste of the band’s music to a new audience.
There is just something about driving down the open road from town-to-town that sparks the imagination of Americans. This freedom is not just an important part of our culture, but the trucking industry is a vital part of the country’s economy.
“Truckin’” reminded us of a recent FreightWaves article shared by a dear friend in the trucking industry (shout-out to LG). It has been our thesis that 2022 would be a bumpy ride as the consumer came down from the COVID-stimulus check high. The result would be less money spent on goods (like patio furniture, computers, cars, hand sanitizer, masks) and more money spent on experiences (like travel, concerts, dining). The trucking industry can be an important indicator of future economic activity and validation for the thesis.
You're sick of hangin' around and you'd like to travel Get tired of travelin', you want to settle down I guess they can't revoke your soul for tryin' Get out of the door and light out and look all around
According to Craig Fuller, CEO of FreightWaves, “March has been unusually soft in the truckload freight market, according to the SONAR Outbound Tender Volume Index (OTVI). Because this index measures actual truckload tenders in the contract market, it provides a very reliable indicator of market direction.”
Fuller further explains, “March is typically a strong month for trucking, as shippers start to stock their shelves in preparation for summer. And late March normally gets a reliable end-of-quarter boost in volumes as shippers pump sales and reduce inventories. This year, we are not seeing that surge. In fact, March volumes are softer than at any point in 2021 (other than holidays).”
The chart below displays trucking volumes. The red line is 2021 and the blue is 2022. Note, while volumes are down this year compared to last year, they are still at the average line (green-dashed).
In 2021, trucking satisfied the pandemic demands of 2020 and 2021, but the industry did see a dip in demand in Q4 of 2021, prompted by two factors: consumers had already loaded up on supplies in case of supply chain issues and retailers were building up inventory to avoid holiday season stock-outs.
According to Zac Rogers, a professor of supply chain management at Colorado State University, “[retailers] don’t need to place the normal orders that [they] would probably be placing right now in March and April, because [they] have so much stuff left over from December, January and February.”
The chart confirms an important element of our thesis for 2022—the strong demand for some goods from 2021 will subside as consumers shift their spending. This return to normal from the unsustainable, inflated levels was inevitable and healthy. And while the demand for many goods was pulled forward, bringing us into a lull, this does not necessarily mean a recession. Further, we invest in stocks and not the economy, so a slowdown does not mean your entire portfolio must suffer.
We’ve read many reports that higher gas prices in concert with higher borrowing costs (or interest rates) will cause a decrease in demand for goods, creating an economic ripple effect leading to a recession; however, it’s not that simple.
Before accepting this narrative, we suggest investors first explore the importance of consumer goods to the economy. In 2019, 70% (or $13.28 trillion) of GDP was consumer spending. Of that spending, 36% (or $4.8 trillion) was on goods. At 36% of consumer spending, goods are an important part of the U.S. economy, but there is 64% of spending on services. Thus, it is possible that a 2022 slow-down in durable goods purchases is not going to affect all companies equally.
Lately, it occurs to me What a long, strange trip it's been
The pandemic years of 2020 and 2021 were certainly a long, strange trip, and now we find ourselves facing the quandary of 2022:
Is the slowdown in spending of goods in 2022 putting the economy into recession? Or, will the slowdown in goods lower inflation and cause the Fed to raise rates less than the market expects? Today, we believe the data points more toward the second statement.
Our forecast: the decreased demand for durable goods will ease inflation, but not prompt a recession as it takes more than one negative economic indicator to do so; the economy will slow in response to the shifting landscape of supply and demand; and the Fed will be able to do less rate hikes than expected.
Sometimes the cards ain't worth a dime If you don't lay 'em down
What does this mean for investors? Start trimming back on risk in consumer goods related stocks as both national and global factors point to market volatility and look to lay down your cards for the blue-chip technology, commodity, and clean energy stocks that could thrive in this environment.
Disclosures
INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS OR INVESTMENT STRATEGIES. BLOOMBERG IS THE SOURCE OF MARKET DATA. INVESTMENTS INVOLVE RISK AND ARE NOT GUARANTEED. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.