The Days Ahead:

  • Company reports (mostly financials) and housing starts.

This Week:

  • Americans saved a lot during COVID-19, creating a huge “excess” savings hoard.
  • It’s mostly gone now.
  • But spending is mostly driven by having a job.
  • And employment and hours worked are at record highs.
  • We take a look at the biggest buyer of U.S. stocks.
  • They should continue to remain very prominent.
  • A U.S. media company takes over a very Euro-centric sport…
  • And has plans to make it a huge global brand.

Programming Note:

  • There will be no Market Digest next week. You can find regular updates from Cerity Partners Investment Office here.

American Savings

Savings rates sounds simple but calculating them it is a bit of a guessing game…ok imprecise science. We measure it by taking the difference between two very large numbers. In this case, it’s the $23,694 billion in personal income, less taxes of $2,985 billion, to give disposable personal income (DPI) of $20,709 billion, We then subtract spending of $19,963 billion to get $745 billion. That’s plugged into the DPI to give you a savings rate of 3.6%.

Whenever you take the difference between two very large numbers, you’re likely to end up with errors. The $745 billion is just money we don’t know what happened to. It may have gone to savings or into untracked spending. It certainly won’t add up to the same number that went into mutual funds, bank accounts or other traditional savings.

The Bureau of Economic Analysis (BEA) revises the savings rate regularly. In the 1990s the U.S. rate was around 2% of DPI. It was often said that U.S. workers didn’t save enough and that they should learn from thriftier economies like Germany and Japan. But when the BEA revised the numbers in 2009, to take account of misreported income, flexible health benefits, and pension accruals, it found the savings rate was actually 5%.

In 2017 they found that personal income was less than first estimated and made further revisions. The revised rate (blue line) ended up much higher than the original report.

Figure1 - Excess Savings Data Chart
Source: Bureau of Economic Analysis

So far, so good. People were thriftier than they seemed.

But during COVID-19, savings started to move erratically. Let’s start with the following chart.

Figure2 - Excess Savings Data COVID Chart
Source: San Francisco Federal Reserve

The blue line show reported monthly savings, which ran about $80 billion to $100 billion a month in 2019. They quickly rose to around $500 billion when COVID-19 restrictions took hold and people rapidly cut spending. The economy declined 10% in less than six months. If this hadn’t happened, we can assume savings would have continued on trend, following the orange line.

The combination of restricted spending and job loss fears meant the savings rate jumped to 32%. But then we saw around $4,600 billion of government support through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan. That put more money into people’s pockets and created a vast pool of “excess” savings.

Excess savings were simply any time the blue line was above the orange trend line.

They peaked at over $2,000 billion but in 2022, people began to dip into savings. The economy grew from $22,600 billion in early 2021 to $27,957 billion in late 2023. The growth of $5,000 billion was like adding the entire Japanese economy to the U.S.

Some growth came about because there were more people at work and some through consumers spending down savings. Excess savings now looks like this:

Figure3 - Excess Savings Data Hoop Chart
Source: San Francisco Federal Reserve

It ran up quickly as the economy tanked and the two relief programs came on stream.

It’s now close to zero, which means, in aggregate, American consumers no longer have excess savings. They have plenty of savings, acquiring $1,495 billion of new financial assets in 2023. This is on top of a record amount of net financial assets, at around $98,303 billion or 3.5 times GDP, the same ratio as 2019. But the excess savings seems gone.

Should we be worried? The San Francisco Federal Reserve isn’t. One reason is that the excess savings weren’t spread evenly. The two lowest income quintiles held around 4% to 29% of the total (the numbers are difficult to pin down) and the two highest held 40% to 70%. The highest groups probably still have excess savings but the lower-income groups have spent theirs and cut into regular savings.

But this doesn’t mean the economy is about to halt. It just means that the economy is returning to normal. There are 3 million more people working than pre COVID-19 days and 28 million more from the 2020 lows. They’re also working longer hours. The total hours worked in the economy is 21% above the 2020 lows. The best indication for spending is for people to be working. And they are, in record numbers.

Low-income households are probably more cash strapped and that’s where we may see credit card problems. For the lowest income groups, delinquencies rose from 2.6% to 3.4% in 2023 but are only 0.5% above pre-COVID-19 levels.

We’d expect consumption this year to be financed mostly by income growth and employment rather than any run down in savings. The recent trend in retail sales suggests reduced spending is already underway. The economy is unlikely to grow at the 4.9% and 3.4% rates it did in the final two quarters of 2023. But employment and wage growth remain solid. Growth should be around 2% for the year.

The run down in savings and especially the excess savings is not a worry.

Who’s the Largest Buyer of U.S. Stocks?

This is one of those trick questions. Is it mutual funds, pension funds, households or foreigners? Nope. It’s companies buying their own stock. The Fed recently tracks “gross issuance”, which is when companies raise money in an IPO or grant options, and how much stock is “retired” from mergers and share buybacks.

Figure4 - Equity Issuance  Retirement Chart
Source: Federal Reserve, Cerity Partners

The orange line shows the value of shares that are retired by buybacks or mergers. When company A buys company B, shareholders are typically compensated in cash and the shares of company B are liquidated. Think of both as shares “leaving” the market.

The blue line is the sum of both those plus the amount of new IPO and employee grant shares. The latter is when a company issues, say, 1,000 shares in employee options. When the employee exercises the grant, 1,000 new shares enter the market. Management typically tries to neutralize this addition by buying 1,000 shares in the open market. The net result is there are no new shares.

In Q4 2023, companies repurchased shares to the value of $379 billion (orange line and think of it as a negative number because they’re leaving the market) and added $108 billion of new shares, mostly for employee compensation. The net result was the blue line of -$271 billion.

The blue line, or net amount, has rarely been above zero since 1996, meaning companies withdrew more capital than they raised over the last 27 years. In the entire period, companies removed $17,359 billion of shares and issued $10,049 billion for a net withdrawal of $7,310 billion

In the last five years companies have spent $3,300 billion on buybacks and $2,273 billion on dividends for a combined average payout of 4.0%.

We’d expect this to continue. Even in the depths of 2020, companies bought back $519 billion of new shares and in 2022, a bad market year, bought $922 billion.

But it’s a curious thought. In aggregate, companies don’t use the stock market to raise new capital. They use it to distribute profits.

America on Track

A few years ago, Liberty Media, which owns SiriusXM radio, bought the Formula 1 (F1) race series. They took it from a tired, processional racing sport with a narrowing fan base, to one of the most watched sports events in the world. It has around 500 million fans of which only 1% will attend the 20 or so races in a season. Track attendance in 2023 ranged from 35,000 in Bahrain to 315,000 in Las Vegas. But the Netflix series “Drive to Survive” drew some 90 million viewers and is the major reason the fan base tripled in the last five years.

F1 is still processional and highly predictable but thanks to the promotion and association with luxury and deep pocketed brands like Rolex, Louis Vuitton, Aston Martin, Ferrari, Red Bull, Oracle and about 275 others, it’s become a huge hit.

Now this.

Race car and motorcycle images
Source: Liberty Media

Liberty just bought the motorcycle equivalent of F1.

This is the first time an American company has bought into a world motorcycle series. It’s not a sport that draws much attention in America. So why is Liberty buying it?

Opportunity, size and potential. American businesses are very good at sports marketing. The UK Premier Division now has a huge U.S. audience. The Name Image Likeness (NIL) meant more money for the NCAA and women’s collegiate sports. Events like UFC (300 million) and WWE (90 million), Nitro Circus (50 million) created new fans out of sports that barely existed a few years ago.

MotoGP needs help.

MotoGP should have a lot going for it. A MotoGP bike and a F1 car share the same top speed, around 230 mph. They have the same grid size, around 22, the same number of races per year, around 23, and often share the same tracks.

MotoGP has excellent racing. Last year there were eight different winners and the world champion, Peco Bagnaia, won seven of the 20 rounds. He had an 8% margin over the second-place winner. In F1 there were only 4 winners and the world champion, Max Verstappen, won 19 races. He had a 102% margin over the number two. The average gap between first and third in F1 is around 15 to 30 seconds. In MotoGP it’s 1 to 3 seconds.

MotoGP has three problems. First, specifications keep changing. The bikes started adding more aero and ride height devices in the last few years which added to costs. Second, those spec changes make it very risky to overtake. A MotoGP bike at full chat creates a very hot vacuum behind it. This can suck the following rider into the vacuum, which causes brake and tire failure. And third, that’s leading to lots of injuries. Eight of the riders missed races in 2023 due to injury. There were none in F1.

Liberty should be able to create a younger, more diverse and global fan base. There are around 85 million cars produced every year and 60 million motorcycles of which 16% are electric. But motorcycle growth is running at around 7%, twice that of the car market. It’s the first choice of transport in many countries. India, for example, has 243 million motorcycles and 60 million cars.

Liberty should be able to create a “Drive to Survive” like series with behind-the-scenes footage of riders, managers and commentators and start to pump up the skills, techniques and personalities behind competitive motorcycle racing. There’s likely to be a growing level of interest in coming years and it will be thanks to U.S. marketing and promotional know-how.

We will, of course, keep you updated.

The Bottom Line

Two inflation reports dominated the week, with the core CPI coming in at 0.4% for March against an expectation of 0.3%. The actual number was 0.359% but the rounding pushed it up to 0.4%. This was the third disappointing inflation read in a row, and the market took the view that it was more of a trend than a one-off.

In our view, though, there were a lot of one-offs, including car insurance, up 22%, which will begin to ease, and hospital services, up 7%. Hospitals tend to push through price increases earlier in the year.  

The other inflation report was for producer prices, which went the other way, with lower numbers for trade services (really just company margins). They grew at a 15% to 20% rate in 2022. They’re now down to 0.7%.

The 10-year Treasury did not like Wednesday inflation numbers and rates increased to around 4.57%. Recall that we saw a big drop in rates last fall, when the 10-year Treasury fell from 4.9% to 3.9% in two months. Rates are firmly at the top of the range and the talk is not of three or two cuts this year, but maybe none. However, we think a cut is likely.

Stocks didn’t much like the inflation report either and were down 2.2% at one point. They’re down 1.3% from the all-time high from March 28, 2023.

Earnings season starts this Friday with the banks reporting. We’d expect company, rather than economic, news to drive the headlines in the next few weeks.

Art of the Week: Megan Rooney (b. 1985)

Please read important disclosures here.