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

The headlines about new stock market highs are hiding the fundamental erosion in many consumer areas. While employment looks fine and inflation seems stable, consumers are making budget shifts to match their higher expenses to their income levels.

For example, “Stock Market: Companies Are Struggling With Inflation-Driven Consumers” describes some of the actions consumers are taking:

• Switching to lower-priced brands (e.g., store brands)
• Substituting alternate products (e.g., chicken for beef)
• Reducing consumption (e.g., one scoop of ice cream)

These actions can negatively affect the packaged food companies.

Importantly, consumer actions are undermining many companies in the “safer” “consumer defensive” sector (as compared to the more volatile “consumer cyclical” sector). Investor expectations for the sector are for steadier investment returns, but performance often has been weak.

The S&P 500 packaged foods companies

Here is a look at the S&P 500 companies in the “packaged foods” industry within the consumer defensive sector. The key measure is the real (inflation-adjusted) return for the entire Covid period.

Note in the table below that all the company stocks hit a high return earlier in the period when inflation began its runup and companies were able to raise prices as consumers paid up. Since then, though, consumers are adjusting their spending plans to mitigate the higher prices. Those actions have trimmed companies’ real revenues and real profits, thereby producing poor real stock performance. (Performance results are total returns that include dividend income.)

Where do things go from here?

Based on the same issues and actions in the early 1970s, the situation will likely continue. Importantly, as consumers adjust spending patterns and businesses seek ways to maintain profit margins other than raising prices, the economy could soften. If that happens, expect the stock market to show weakness also. One key industry that sees downturns when the economy weakens is “food away from home” – i.e., eating out at restaurants and fast-food establishments. Thus far, many of those companies’ stocks have shown good returns even as their costs and price increases have outdistanced the general inflation numbers.

The bottom line – Inflation’s effects continue

The Federal Reserve’s 0.25% Federal Funds rate cut may seem like a positive indicator for the economy and inflation. However, price rises continue to compound upon all the prior price increases.

For example, core-CPI inflation over the past twelve months through August was 3.1%. However, as of August 2024, the Covid period core-CPI accumulated inflation stood at 20.2%. Therefore, that recent 3.1% compounds the accumulated total price rise up 3.8% to 24.0%. Therefore, the business/consumer inflation concerns continue.