Stock Market: Consumer Inflation Shifts Appear To Be Weakening Corporate Growth

Despite headline stock market highs, persistent inflation is driving significant consumer behavior shifts, including trading down and reducing consumption, which is eroding real revenues and profits for companies, particularly within the 'consumer defensive' sector like packaged foods. This trend, reminiscent of the early 1970s, suggests a potential softening of the broader economy and stock market weakness, with accumulated core-CPI inflation remaining a significant concern despite recent Fed actions, as the 20.2% Covid-era core-CPI has compounded to 24.0% with recent increases.

Analysis

Despite headline stock market highs, a fundamental erosion is occurring within the consumer defensive sector due to persistent, accumulated inflation. Consumers are actively shifting spending patterns to manage higher costs by trading down to lower-priced brands, substituting products, and reducing overall consumption. This behavior is directly pressuring the real revenues and profits of packaged food companies, which, after an initial period of strong pricing power, are now exhibiting poor real stock performance. The article highlights that the cumulative Covid-period core-CPI inflation has reached 24.0% as of August 2024, compounding from a 20.2% base with a recent 3.1% annual increase, suggesting that a minor Federal Reserve rate cut is insufficient to alleviate consumer budget constraints. This dynamic, reminiscent of the early 1970s, points toward a potential softening of the broader economy. Consequently, sectors like 'food away from home' (restaurants), which have performed well thus far, are flagged as particularly vulnerable to a downturn should the economy weaken.

Key Decisions for Investors

• Investors should critically reassess holdings in the consumer defensive sector, particularly packaged foods, as their traditional 'safe-haven' appeal is being undermined by sustained margin pressure and negative consumer behavior shifts.
• It may be prudent to trim exposure to the 'food away from home' sector, as these stocks are identified as being at high risk during an economic slowdown, suggesting their recent outperformance may not be sustainable.
• Maintain a cautious stance on the broader market, focusing on the impact of accumulated inflation on corporate earnings rather than headline index levels, as persistent consumer strain signals potential for wider economic weakness.