Relief and Volatility Ahead for U.S. Stocks

Some investors think a potential recession is already priced in but given defensive leadership, labor statistics and incoming Fed rate hikes, it may be too early to tell.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 18th, at 11 a.m. in New York. So let's get after it.Last week, we highlighted how extreme the 12-month price momentum weightings are for defensive sectors. In fact, it's unprecedented for this type of price momentum to occur outside of an economic recession. One reaction to this development we've heard from many clients is that a recession must already be priced based on this relationship. If true, then defensive leadership is likely to reverse with something else taking the lead, like growth stocks or even cyclicals. We disagree and believe defensive leadership will likely persist until either a recession is officially announced, or the risk of a recession is definitively extinguished.In our view, the first outcome can only be achieved with a series of negative payroll data releases, something that still seems far away given last month's 372,000 new job additions. The second outcome—a soft landing—will also be hard to prove to the market until earnings revisions bottom out and companies stop doing hiring freezes.With respect to the recession outcome, the odds have been steadily increasing now for months. Morgan Stanley's proprietary economic model is currently suggesting a 36% probability of a recession in the next 12 months. Historically speaking, once it reaches 40%, it's usually a definitive reading that recession is oncoming. Furthermore, jobless claims have been rising the past few weeks. Secondarily, the household survey for total employment peaked in March and has fallen by approximately 400,000 jobs so far. While not the gold standard for measuring labor market health, it's worth watching closely as things can change rapidly for hiring and firing, particularly when profits come under significant pressure, as we expect. Finally, the job openings data has started to roll over, albeit from record high levels, while consumer and business confidence readings remain at record lows.In the very near term, equity markets seem to be digesting another hot Consumer Price Index release very well, even as concerns rose that the Fed might raise rates as much as 100 basis points next week. Our view is that 75 basis points is still the base case, and that should be plenty to keep the Fed on track to getting ahead of the curve. Importantly, the bond market seems to agree with the yield curve inverting the most since the 2000 cycle, quickly catching up to the defensive leadership of the stock market. The bullish take which this market seems to want to try and run with one more time, is that the Fed can pivot before a recession arrives.The other positive that has investors excited again is the fact that bank stocks had a strong rally on Friday, even as the earnings results were quite mixed. While this kind of price action is a necessary condition for the bear market to be over, we would caution that second quarter results are likely to be the first of several cuts, not just for banks, but for the market overall.The bottom line is that this earnings season is likely to be the first of several disappointing ones, especially if a recession is the endgame. Therefore, staying defensively oriented in one's equity positioning should remain the best course of action for the next several months.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

18 Jul 20223min

This week brought yet another reading of inflation that exceeded expectations, but if markets and central banks are able to think long-term, there may be some hope on the horizon.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, chief cross-asset strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape, and how we put those ideas together. It's Friday, July 15th at 4:00pm in London.One of the big stories this week was, once again, a high reading of US inflation that came in above economists’ expectations. If that sounds familiar, it’s because it is. US consumer price inflation was also higher than expected in June, May and April.These upside surprises to inflation create a trio of problems. First, investors will feel more confident if inflation starts coming down, and this is yet another month where that isn’t the case. Second, the Fed has been adamant that it will keep raising interest rates until inflation moderates, which means that more rate hikes are likely coming. And third, this sets up a real predicament; the Fed wants to bring inflation down, and sees this as key to its credibility, but raising rates today won’t do much for inflation over the short-term. That creates additional uncertainty.Markets are responding to that uncertainty by raising expectations of how much the Fed will increase rates in the near-term, while simultaneously becoming more worried about medium-term growth, and lowering expectation of rates over the long term. That has inverted the yield curve, something that, while rare, has historically signalled high odds of a recession.What’s notable, however, is that while there is intense focus on the concerns and negative surprises from the current rate of inflation, the longer-term picture is arguably getting better. One can observe expected rates of inflation over the next 5, 10 or 30 years, also called inflation break-evens. Those expectations have been falling rapidly over the last 2 months.In the US, markets currently see US Consumer Price Inflation to average about 2.35% over the next decade. That is more than half-a-percent lower than where that same estimate was just two months ago, and it’s similar to where these expectations were in March of 2021. 2.35% is also pretty close to the Fed’s inflation target; markets do not see inflation accelerating in an uncontrolled manner over the long term.For investors, think of this dynamic as one of short-term pain but longer-term gains. Near-term high inflation, and uncertainty of when it will decline, could keep the Fed cautious and argues against buying the dip.But looking further out, the market is giving encouraging signs that inflation is a manageable problem, and that central bank actions are working at addressing it. In the autumn, we could see a situation where the inflation data is moderating, while long-term inflation expectations confirm that that moderation continues. For markets, and for central banks, that would be much more helpful.Thanks for listening! Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review! We’d love to hear from you.

15 Jul 20223min

Original Release on July 1st, 2022: For the last decade investors have been focused on highflying growth stocks, but this investing environment may be the exception rather than the rule. Chief European Equity Strategist Graham Secker and Global Head of Quantitative Investment Strategies Research Stephan Kessler discuss.-----Transcript-----Graham Secker: Welcome to Thoughts on the Market. I'm Graham Secker, Morgan Stanley's Chief European Equity Strategist. Stephan Kessler: I am Stephan Kessler, Global Head of Quantitative Investment Strategies Research. Graham Secker: And on this special episode of the podcast, we'll be talking about the potential return of value investing post its decade long decline since the global financial crisis. It's Friday, July the 1st, at 10 a.m. in London. Graham Secker: As most listeners of this particular podcast are probably aware, for much of the past decade, investors have had something of a love affair with the highflying growth stocks in the market. Meanwhile, their value priced counterparts, the shares of which tend to trade at relatively low price to earnings multiples and or offering higher dividend yields, have had a considerably rougher time of it. But I believe that the last decade is more the exception to the rule rather than the norm. And I think your analysis, Stephan, shows that this is true, yes? Stephan Kessler: Yes, I agree. We have looked at the performance of value as an investment style back to the 1920s, and we find that the period between the end of the global financial crisis and the COVID pandemic was only the decade where value did underperform. For me, the why here is really an interesting question to pick apart, which you and I look at through two different lenses. You're the fundamental strategist and I'm the quantitative analyst. So I think my first question to you is, from your fundamental point of view, what were the main drivers of value’s underperformance during this lost decade? Graham Secker: Yes. So from our perspective, we think there were two main drivers of values underperformance post the GFC. Firstly, a backdrop of low growth, low inflation and low and falling and negative interest rates, created a particularly problematic macro backdrop for value stocks. The former two factors were weighing on the relative profitability of value stocks, while the very low interest rates were actually boosting the PE ratio of longer duration growth stocks. This unpalatable macro backdrop then coincided with a challenging micro backdrop as the broad theme of disruption took hold across markets. This prompted greater hope among investors for the long term growth potential of the disruptors, while undermining the case for mean reversion across other areas of the market whereby cyclical slowdowns were often effectively viewed as structural declines. So, Stephan, you've said that the discount on value stocks cannot be explained fully by fundamentals or justified by the earnings overview. What do you believe are the deeper drivers for this discount? Stephan Kessler: When you look at the value, it faced over the past few years, a range of challenges really. On the behavioral side, investors have focused on growth stocks and growth opportunities. This led to a substantial and persistent deviation of equities from their fair values and an underperformance of value investors. Next to this more behavioral argument, we find that the environmental, social and governance related aspects or in short, ESG and monetary policy were themes which drove price action. Equity value has a negative exposure to those themes. And finally, when you look at the 2020 period, there was a classical value trap situation. Companies which were most affected by the COVID pandemic sold off and appear cheap based on quite a range of value metrics, while the COVID catalyst continued to disrupt markets and led to companies which were cheaply valued not being able to recover as they had exposure to these disruptors. This only start to resolve in 2021, which is also when we start to see value regain performance. To get back to a more generalist view of the main drivers of values underperformance, I'd like to get back to you, Graham. You've observed a link between the macro and the micro, which created something of a vicious circle for value in the last cycle. Can you talk about how this situation looks going forward? Graham Secker: Yes, going forward, we think this vicious cycle for value could actually turn to be something more of a virtuous cycle over the next few years. We argue that we've entered a new environment of higher inflation and associated with that higher nominal growth, and that drives a recovery in the profitability of these older economy type companies. And at the same time, a rising cost of capital undermines the case for the disruptors. And that can happen both in terms of lower valuations off the back of higher interest rates, but also as liquidity starts to subside, a lack of capital to fund their future business growth. Stephan, you mentioned two of these key disruptive forces, quantitative easing by the central banks and then the rise of ESG. Can you talk about the impact of these two elements on the equity investment landscape? Stephan Kessler: ESG is a major theme in financial markets today, and in particular in this 2018-20 period we saw ESG positive names build up a premium, which made them appear expensive in the context of value metrics. These ESG valuation premia then turned out to be persistent and at times even grew. This then goes, of course, against value investors who try to benefit from this missed valuations mean reverting. And to the extent these valuations even turn stronger, that drove their losses. Quantitative easing is another aspect that drove price action. We find that value tends to underperform in time periods of low interest rates and does well in a rising rates environment. The economic driver behind this empirical observation is that the very low rates you saw in the past make proper valuations of firms difficult as discounted cash flow approaches are challenged. And so on the back of that, lower rates simply lead to valuation and value as signals being challenged and not properly priced. So given the historical narrative and all the forces at play during the past decade, what is your preference between value versus growth for the second half of 2022 and beyond that, Graham? Graham Secker: Yes. So in the short term, a backdrop of continued high inflation and rising interest rates should we think continue to favor value over growth. However, perhaps right towards the end of this year, we do envisage a situation where that could reverse a little bit, albeit temporarily, once inflation has peaked and the economic downturn has materialized, investor attention may start to focus on rates no longer rising, and that will put a little bit of a bid back under the growth stocks again. But I think if we look longer term, actually, I'm beginning to think that what we'll see is the whole value versus growth debate actually becomes a bit more balanced and hence I can see more range bound relative performance thereafter. And Stephan, from your perspective, in a world of rising bond yields and lower or normalized QE, what is your outlook for value going forward, too? Stephan Kessler: Well, when we look at the two catalysts for value underperformance, ESG and quantitative easing I mentioned earlier, we see that their grip on the market is loosening. For one, markets have moved into rates tightening cycle which means investors focus more on near-term cash flows rather than terminal value. This is a positive for value companies, which tend to well under such considerations. Furthermore, the dynamism of ESG themes has abated compared to the 18-20 period, leading to a lower effect on value. Another angle on this is also a look at the valuation of value as a style. It's quite cheap, so it's a good entry point. This leads to a positive outlook for value, but also for other styles. We like, particularly the combination of value and quality as it benefits from the attractive entry levels for value, as well as the defensiveness of an investment in quality shares. Graham Secker: So to summarize from a fundamental and quantitative approach, both Stephan and I think that the extreme underperformance of value that we've seen over the prior decade has ended, value looks well-placed to return to its traditional outperformance trends going forward. Stephan, thanks for taking the time to talk today. Stephan Kessler: Great speaking with you, Graham. Graham Secker: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts, and share the podcast with a friend or colleague today.

14 Jul 20228min

After the recent Supreme Court ruling against the Environmental Protection Agency, Democrats appear poised to respond with a budget reconciliation plan that could impact health care, clean energy, and corporate taxes.-----Transcript-----Welcome to the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, July 13th, at 10 a.m. in New York. The Supreme Court just finished a busy session, and one of the judgments that investors should pay attention to was for the case, West Virginia vs the Environmental Protection Agency, the EPA. That judgment said the EPA had overreached on some regulations, embracing something called the Major Questions Doctrine, whereby the court suggested regulators should not be using prior legal authority to decide issues of major economic and political significance. Said more simply, the ruling suggests regulators need explicit authorization from Congress rather than just stretching current legal authorization. So the ruling basically punts many of the EPA's climate policies back to Congress for deliberation. And that matters for investors because it might be a motivating factor in the Democrats getting their budget reconciliation plan over the finish line. Without being able to rely on the EPA to enact climate policies, Democrats may be willing to compromise more within their own party to get done a package of tax increase funded initiatives on climate and health care. And recent news flow suggests Democrats continue to make progress in this direction. So let's break down what's reportedly in this package that investors should be aware of. There's a plan to let Medicare negotiate the prices it pays for certain prescription drugs. That's a fundamental challenge for the pharma sector. But as our pharma team has noted, it's not an existential one. And so the sector could still be an outperformer in a market that needs to further price in the potential for a recession, an environment where defensive sectors like pharma typically do well. Also reportedly in the plan is fresh spending on, and tax breaks for, clean energy technologies, a potential demand boost for the clean tech sector which our analysts remain quite constructive on.But funding that plan is several tax adjustments, including a potential implementation of a corporate book tax, which you can think of as a corporate minimum tax. This could exacerbate corporate margin pressures from inflation in the economic growth slowdown. So while the sectors we just discussed could be outperformers, they would likely do so against the backdrop of a bear market for equities overall. With Congress in session ahead of its August recess, we expect to learn more in the next couple of weeks, and we'll, of course, keep you in the loop. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

13 Jul 20222min

As Europe continues to curtail Russian gas imports, equity markets are preparing for further downturn in European economic growth, but there may be more risks yet to be priced in.Important note regarding economic sanctions. This research references country/ies which are generally the subject of comprehensive or selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Any references in this report to entities, debt or equity instruments, projects or persons that may be covered by such sanctions are strictly incidental to general coverage of the relevant Russian economic sector as germane to its overall financial outlook, and should not be read as recommending or advising as to any investment activities in relation to such entities, instruments or projects. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned country/ies are carried out in compliance with applicable sanctions.-----Transcript-----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the two key issues that are dominating our current discussions with European equity clients, namely Russia gas supplies and the belated start to a new earnings downgrade cycle. It's Tuesday, July the 12th, at 2 p.m. in London. Over the last few months, we have been arguing that a curtailment of Russia gas imports represented the biggest risk to European equities and the main catalyst to push us down to our bear case scenario. While we are not yet ready to formally change our bull, base, or bear case index targets, recent news flow does suggest that risks remain skewed to the downside, and we note a further 17% downside from here to our bear case price target for MSCI Europe. Recent headlines about a reduction in Russia gas flows and the German government's move to level two of their emergency gas plan, has prompted our European economists to further lower their own GDP forecasts, and they now see a mild recession developing over the winter. However, with higher energy costs keeping inflation higher for longer, they make no changes to their European Central Bank forecasts and still expect European interest rates to move out of negative territory over the next few months. We have been expecting an EPS downgrade cycle to start in the third quarter, even before the recent rise in concerns around Russian gas supplies. While the realization of this risk event would likely drive a materially larger hit to profits, we note that European earnings revisions have already turned negative over the last couple of weeks, i.e. we are now seeing more analysts lowering EPS estimates than raising them. The sharp fall in equities over the last few months suggests that investors are already anticipating a sizable pullback in European profits. However, we do not think this means all of the bad news is already in the price. Rather, we note that a study of prior downturns suggests the stock markets tend to trough 2 to 3 weeks before earnings revisions bottom and that the minimum time duration between the start of a new downgrade cycle and this trough in earnings revisions is at least 3 months, but more often runs for over 6 months. In short, we are likely starting a 3 to 6 month earnings downgrade cycle and equities are unlikely to trough until we move towards the fourth quarter. Within the market, we expect the more defensive sectors to continue to outperform over the next couple of months, given their traditionally lower level of earnings volatility into a recession. The recent move lower in bond yields should also encourage some reinvestment into quality and growth stocks, and we have just raised luxury goods to overweight on this theme. In addition, the luxury sector should be a key beneficiary of the recent upturn in investor sentiment towards China. Luxury has a greater exposure to the China consumer than any other European sector. In contrast, we continue to recommend a more cautious stance on cyclicals, who don't traditionally start to outperform until the market itself troughs. Year to date, cyclical underperformance has been primarily driven by weakness in consumer facing stocks, reflecting the pressure on disposable income from high inflation. However, going forward, we expect to see greater underperformance from industrial cyclicals as weakness in end demand starts to move up the chain. These same companies are also likely to be the most adversely impacted by the disruption to Russia gas supplies, whether this be in terms of top line volumes, profit margins or both. For this reason, we are most cautious on stocks within the industrial, materials and autos sectors that also have a high degree of exposure to European end markets. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

12 Jul 20223min

While stocks have recently rallied, the strength of the U.S. dollar has risen sharply over the past year, presenting a major potential headwind for equities in the coming earnings season.-----Transcript-----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, July 11th, at 11 a.m. in New York. One of the more popular views over the past decade has been the eventual decline of the U.S. dollar. After all, with the Fed printing so many dollars since the global financial crisis and then doubling down during the COVID pandemic, this idea has merit. However, after the great financial crisis, these printed dollars never made it into the real economy, as they were simply used to patch up broken balance sheets from the housing bust. Therefore, money supply never got out of hand. In fact, during the entire period after the Fed first embarked on quantitative easing in November 2008 through the end of the cycle in March of 2020, money supply growth averaged only 6%, right in line with the long term trend of money supply and nominal GDP growth. As a result, the U.S. dollar maintained its reserve currency status and actually rose 40% during that decade. However, as we pointed out back in April of 2020, the stimulus provided during COVID was very different. At the time, we suggested that the coordinated fiscal and monetary policy was unprecedented. The result is that money supply growth exploded and since February 2020 has averaged 17%, or three times a long term trend, a truly unprecedented outcome that left us with much more inflation than what was desired. Now, with the Fed reversing course so quickly and the checks having stopped long ago, money supply growth has fallen all the way back to its long term trend of just 6%. Given the projected path for rate hikes and quantitative tightening, money supply growth is likely to fall even further, and the dollar is unlikely to show any signs of decline until the Fed pivots. Such a pivot seems unlikely any time soon, especially after last week's strong jobs report. So why does this matter so much for stocks? Based on the extreme rally so far this year, the U.S. dollar is now up 16% year over year. This is about as extreme as it gets historically speaking and unfortunately it typically coincides with financial stress on markets, a recession or both. For stocks the stronger dollar is also going to be a major headwind to earnings for many large multinationals. This could not be coming at a worse time as companies are already struggling with margin pressure from cost inflation, higher or unwanted inventories and slower demand. The simple math on S&P 500 earnings from currency is that for every percentage point increase in the dollar on a year over year basis, it's approximately a 0.5 hit to earnings per share growth. Of course, things can change quickly, but it doesn't seem likely until the path of inflation slows enough to warrant a Fed pivot. The main point for equity investors is that this dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons. Therefore, the recent rally is likely to fizzle out before too long. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

11 Jul 20223min

As investors in the internet industry have begun to wonder if online dating platforms will sink or swim in the case of a recession, looking back on the last recession may shed some light on a potential shelter from the storm.-----Transcript-----Welcome to Thoughts on the Market. I'm Lauren Schenk, Equity Analyst covering the small and mid-cap Internet Industry. Along with my colleagues, bringing you a variety of perspectives, I'll be giving some insight into consumer spending trends through the lens of online dating. It's Friday, July 8th, at noon in New York. How does online dating perform in a recession? Believe it or not, it's the number one question I've heard from investors over the last several weeks. And I think another way of getting at this question broadly, and you can really extrapolate this across many industries, is do consumers view a product as a necessary staple or as non-essential spending? On one hand amid elevated inflation on indispensable items like gas and groceries, you may think consumers would view online dating as a nonessential item. On the other hand, finding love or a significant other ranks usually pretty high in most people's life goals, so maybe it's a staple. So that's the question we sought to answer recently when we looked into how online dating platforms perform during a recession. To dig into this, we looked into some historical data from 2007-2010. What we found was that, for one online dating platform, subscriber growth was largely unaffected and actually accelerated slightly in 2008 and 2009. The net impact for this platform was a slight slowdown in organic revenue growth from low double digit growth in 2007, to mid-single digits in 2008 and 2009, and then accelerating to high teens by the end of 2010. So overall, we found that the continued need for human connection, and the low price of online dating, resulted in minimal business impact during the global financial crisis, despite a significant pullback in consumer spending. Looking at today, online dating has now become a more widely accepted service to a wider range of people. But how are things different from the last recession? Well, I'll share a few key differences from our research. First, online is now a primary way for couples to meet, with the percentage of U.S. relationships starting online increasing from 22% in 2009 to 39% in 2017, which makes it more of a staple than discretionary. Second, we believe there is greater pent up demand for the product today than in 2008 and 2009, given COVID. Which could better insulate online dating, since consumers may be less inclined to cut spending on services that were under consumed during the height of COVID. Third, the top brands have changed and are now predominantly mobile based versus desktop, and attract a younger user who typically have a lower income than 40 plus year olds. And finally, given the brand and geography shifts, a la carte revenue from things like profile boosting is a larger percentage of revenue today than during the global financial crisis, which may prove more discretionary than subscriptions. How does this impact our view of how online dating could perform in a potential recession? Given the 2008-2009 results and the differing macro factors of a potential 2023 recession we have increased confidence in our view that online dating is one of the best consumer internet sub industries to weather a potential recession storm. After all, people still need love and relationships in recession and you can argue they need it more. And the low average monthly cost means it's likely not an item that single consumers would cut first. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

8 Jul 20223min

As inflation continues to be a major concern for the U.S., investors will want to pay attention to how spending, travel and sentiment are changing for consumers.-----Transcript-----Welcome to Thoughts on the Market. I'm Michelle Weaver, a U.S. equity strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be sharing the pulse of the U.S. consumer right now amid elevated inflation and concerns about recession. It's Thursday, July 7th, at 2 p.m. in New York. Consumer spending represents roughly 65% of total U.S. GDP. So if we're looking for a window into how U.S. companies could perform over the next 12 months, asking consumers how confident they're feeling is a great start. Are consumers planning on spending more next month or less? Are people making plans for outdoor activities and eating out or are they staying at home? Are they changing travel plans because of spending worries? These are a few of the questions that the equity strategy team asks in a survey we conduct with the AlphaWise Group, the proprietary survey and data arm of Morgan Stanley Research. We recently decided to change the frequency of our survey to biweekly to get a closer look at the consumer trends that will affect our outlook. So today, I'm going to share a few notable takeaways from our last survey, which was right before the July 4th holiday. First, let's take a look at sentiment. The survey found that inflation continues to be the top concern for two thirds of consumers, in line with two weeks before that, but significantly higher compared to the beginning of the year. Concern over the spread of COVID-19 continues to trend lower, with 25% of consumers listing it as their number one concern versus 32% last month. And 41% of consumers are worried about the political environment in the U.S. versus 38% two weeks ago, a slight tick up. Apart from inflation, low-income consumers are generally more worried about the inability to pay rent and other debts, while upper income consumers over index on concerns over investments, the political environment in the U.S., and geopolitical conflicts. A second takeaway to note is that consumer confidence in the economy continues to weaken, with only 23% of consumers expecting the economy to get better. That's the lowest percentage since the inception of our survey and down another 3% from two weeks ago. In addition, 59% of consumers now expect the economy to get worse. This lines up with the all-time lows observed in a recent consumer sentiment survey from the University of Michigan. A third takeaway is that consumers are planning to slow spending directly as a result of rising prices. 66% of consumers said they are planning to spend less over the next six months as a result of inflation. These numbers are influenced by income level, with lower income consumers planning to reduce spending more. We also asked consumers where they were planning to reduce spending in response to inflation. Dining out and take out, clothing and footwear, and leisure travel were among the most popular places to cut back, and all represent highly discretionary spending. And finally, the survey noted that travel intentions are considerably lower to the same time last year, with 55% of consumers planning to travel over the next six months, versus roughly 64% in the summer of last year. We also asked consumers if they were planning to cancel or delay post-Labor Day travel because of inflation. Generally, planned travel post-Labor Day is in line with broader travel intentions. Cruises and international travel were the most likely to be delayed or postponed. So what's the takeaway for investors? It is important to allocate selectively as consumer behavior shifts in order to cope with inflation and company earnings and margins come under pressure. Our team recommends defensive positioning, companies with high operational efficiency, and looking for idiosyncratic stories where companies have unique advantages. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

7 Jul 20224min