Even though many places in the world are still feeling the effects of COVID-19, the US stock market has seen tremendous growth.
After hitting a low of around 26,500 points in late October, it has rebounded up to 35,000 points as of today.
Keep in mind that all of this happened during great times of uncertainty and restrictions being imposed in many places around the world.
The continual surge of the market even during these times tells me that companies and money managers are confident that the worst of the pandemic is behind us.
Recent Earnings Beats
Some companies have really beaten their earnings estimates this quarter.
It’s telling to look at the industries these companies are in because it’s a good indicator of what consumers are spending their money on.
Here’s an example of two companies that stood out.
Ralph Lauren
Take Ralph Lauren (RL) for example. The earnings estimates were $0.89 EPS, but RL recorded $2.29 EPS.
There are some other interesting notes from their earnings report. Their digital e-commerce capabilities saw an 80% growth YOY.
Ralph Lauren achieved their highest gross margin since 2014. Revenue is expected to grow 25%-30% as in the next year.
In Q2 RL’s net revenue increased 176%. Including a 278% increase in physical stores and a 51% increase on their digital platforms.
These strong performance metrics don’t signal a consumer base that believe they will be staying inside and quarantined for work.
This means that many people receiving signs that even if they won’t be returning to the office full time that they are expecting to go out and dress up.
Spirit
Spirit (SAVE) is a budget airline operator that prides itself on being a low cost choice for people who want a vacation.
They managed to beat their earnings with a loss of $(0.34) compared to estimates of a loss of $(0.81).
These figures are adjusted EBITDA earnings per year, which leaves out cash flow activities that are invested back into the company to generate positive future cash flows.
Some of the investments Spirit is making include investing in new routes to accommodate increasing south Florida travel.
Spirit is making investments because more people are traveling now and looking to travel in the future. A good sign for the markets going forward.
Consumer Market Sentiment
I believe these earnings beats and the general upward trend of the market are the result of a couple of possibilities.
Consumers Are Spending At Normal Levels
In some states especially in the Southeast United States, there are little to no lockdowns or restrictions. I would say most consumers in these regions are spending how they spent before the pandemic began.
These consumers are probably contributing to some of the overall positive consumer sentiment, especially in popular vacation locations such as Florida.
However this region is not reflective of the entire nation, and it is a different story in other areas in the United States.
Consumers Are Expecting To Spend At Normal Levels Soon
In other areas where gatherings are still more restricted, the e-commerce capabilities of almost every consumer retail brand has allowed consumers to continue spending on things like clothing.
This is in spite of the fact that their areas might be under restriction.
A big sign of this is Ralph Lauren’s e-commerce growth that I mentioned above.
Consumers are spending with the expectation that their lives will be make to normal sooner rather than later.
They have faith that most restrictions will be lifted and they will be able to spend their money where they want and go where they want.
You don’t buy more Ralph Lauren clothes if you are expecting to stay in and never go out to restaurants or bars or parties.
Consumers Plan To Disregard Restrictions Or They Spend To Feel Better
The last assumption can go either way.
Consumers might be tired of restrictions and plan to go about their normal lives in places that don’t follow the restrictions.
Another option is that consumers are buying more clothes as a way to cope with the fact that they believe restrictions will continue due to the Delta variant.
Think of this a little bit of retail therapy.
I think all of these possibilities are potentially true, and there are probably consumers who are behaving in all of the ways I discussed.
At the end of the day it doesn’t really matter why consumers are spending more, it is beneficial to the markets that consumers are spending more.
Where Is This Spending Power Coming From?
Where is all of this discretionary consumer spending coming from during a pandemic?
I think some consumers have started using a budget!
Increased Savings Rate
The Kansas City Fed published a very telling report titled “Why Are Americans Saving So Much of Their Income?”
In December 2019 Americans were saving 7.2% of their disposable personal income.
By April 2020 the savings percent increased to 33.7%!
They found that the savings rate has stayed around 14% since April 2020. Americans have been saving a lot more during this pandemic and are eager to spend it.
Federal Stimulus
Let’s assume that the average American family is a couple with two kids and a household income of $70,000.
So in the first round of stimulus checks this family would have received $3,400.
The second round would equal $2,400.
Finally the third round would include $5,600.
A grand total of $11,400 would have been given to this average family during this pandemic.
Theres no doubt some of this as gone to essentials such as rent and food, but the government’s reason for direct relief was to stimulate the economy and prevent a recession.
If the broader economy is stimulated, it makes sense that the market will usually follow suit.
There is no doubt a chunk of this relief has gone towards consumer discretionary items, combined with the higher savings rates can attribute to the extra cash a lot of consumers seem to have during this pandemic.
What do you think about the upward trend of the stock market? Are companies and consumers being too bullish? Or do you think they’re bearish and I got the analysis wrong? Let me know in the comments.
Author Bio
Drake is a freelance writer who’s interested in history, economics, art, & beer. Drake graduated with a degree in Supply Chain Management and began working at General Motors. He writes about popular personal finance topics and shares his journey. Make sure to check back for more posts on Abnormal Money.