Before coming into work this morning I stopped to get gas. The price of super premium gas was a staggering $4.89 a gallon, I thought to myself I wonder if anyone is choosing to put premium gas in their car during this time of massive inflation. As I drove, I really started thinking about all the ways I have attempted to scale back the costs of the things I buy. Not by going without, but instead by buying less costly alternatives.
I would not say we have been forced to eliminate things we were used to buying, but we have certainly adapted to rising prices and become even more intentional in seeking value for the things we buy. For example, normally, I have always tended to purchase 12 packs of name brand soda, but for the past year or so, we have gone with off-brand 2-liters. We still eat out as a family most Friday nights, but now we go before 6:00 and usually choose a restaurant that have happy hour food specials. At the grocery store I am more likely to seek out clearance priced meats that have to be used faster, than simply going with the best-looking cut I can find. My guess is some of these tactics are not unique to me, and most of you out there have made changes to your spending habits in similar ways.
As a result of these consumer spending changes, businesses are being forced to do far more to entice budget conscious consumers to choose their products than they would have to during strong economic times. This naturally results in lower profit margins. We saw this first-hand this past Friday when Amazon shocked investors by posting a net loss in its Q1 earnings report and predicting a slower than expected growth outlook for Q2. This resulted in Amazon shares being down nearly 15% on Friday and contributed to an over 3.5% single day drop in the S&P.
I suspect over the coming months Amazon will not be the only corporation posting disappointing revenue numbers. Corporate earnings reports are likely to not be as impressive as we have gotten used to over this past decade. These lower expectations are likely to result in a continued downturn in the overall stock market, as investors become more fearful that we may be on the verge of entering a full recession.
With people spending less and demanding more, some companies are more likely to succeed than others. Premium and luxury brands such as Whole Foods, or Nordstrom are likely to be hit hardest as shoppers opt for more value-oriented merchants like Aldi, or Ross, where prices are generally lower to purchase the things, they need or want.
These are the conditions when active management strategies have the ability produce above average results. While nothing is guaranteed, taking actions in your account now, as we have throughout these past few months to adjust to these changing market conditions.
I am not predicting economic Armageddon is just around the corner, but I do believe there are enough signs present to warrant some actions in preparation for a potential storm. This could mean shifting a portion of your portfolio into industries that tend to do better during poor economic times. For reasons I have already mentioned, investing in discount retailers could be a part of that overall strategy.