Saving the American Consumer Won't Be Easy

The Weekend Edition is pulled from the daily Stansberry Digest.

Chipmaker Nvidia (NVDA) wasn't the only company that reported earnings this week. But not every company could enjoy the same success...

Several consumer-facing businesses – like McDonald's (MCD) and Starbucks (SBUX) – have reported "disappointing" earnings lately. And now, we can add major retailer Target (TGT) to that list.

Trouble is building in the food aisles...

And company leaders are pointing their fingers at inflation.

Target shares fell around 8% on Wednesday after the company posted quarterly results that missed Wall Street estimates. The company also cut its outlook for the current quarter. As CEO Brian Cornell said, higher prices are putting a "strain on the consumer wallet."

Target's same-store sales declined by nearly 5% year over year, and net sales were down 3%. Cornell added that the cost of "food and household essentials" is the biggest concern that Target is hearing from its customers.

McDonald's and Starbucks have said the same recently. Inflation is impacting people's spending decisions today more than in the past year or two... And that's damaging both businesses' bottom lines.

Higher borrowing costs and current interest rates on credit cards (which more and more people are using to buy food) are taking their toll. And once we add in inflation, it's time to be cautious about a weakening economy... either now or in the future.

Main Street matters – even in a bull market. The American consumer is hurting today. And as I'll explain, the potential solutions may not be as obvious as some would hope...

Today, many consumers are struggling just to put food on the table...

Here's one observation from Arie Kotler – the CEO of Arko (ARKO), which operates thousands of convenience stores and fuel stops under names like E-Z Mart and 1-Stop in small towns across America. As he recently told global news service Reuters...

You not only have inflation pressure now but also higher interest rates and fuel prices at $3.59 on average nationally. People are going to drive less and spend less as they have less money in their pockets.

Kotler described his customers as representing the "real America." And these folks are making fewer trips to stores.

Worse, people are digging into their safety funds. Recent research from the Urban Institute found that last year, nearly 1 in 5 adults reported paying for groceries with savings that they didn't intend to use for routine expenses.

You won't find many market analysts or CEOs talking about the "resilient" American consumer anymore. Instead, the buzzwords are "picky" or "choosy."

I even heard one analyst on Bloomberg Radio the other day describe his first-ever trip to a Walmart (WMT). He spoke about how he was stunned by how many items it had, including food next to items like home goods... Oh, the amazement!

He was looking for value – and instead found the reality for most people in America.

Walmart, by the way, performed better than its competition in the first quarter, reporting a nearly 4% gain in comparable sales versus a year ago. Customers clearly see it as the best big store for value deals.

Everyone is hoping for the Federal Reserve's short-term fix...

We could be optimistic and believe the Fed is concerned about the everyday people when it says it will cut rates later this year – and that its stance doesn't have anything to do with potential strain on the banking system, the cost of financing Uncle Sam's debt, or politics.

At least some Fed members have admitted that consumers are hurting...

On Wednesday, the central bank published the minutes from its April meeting. Meeting participants "noted signs that the finances of low- and moderate-income households were increasingly coming under pressure" and saw this as "a downside risk to the outlook for consumption."

They also "pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans."

But cutting rates would only be a short-term fix for a spending slowdown. And lowering borrowing costs will likely erode the value of our dollars even more over the longer run, with inflation running above 4% annualized (using January-to-March data of the Fed's preferred "core" personal consumption expenditures measure).

Granted, cutting rates could still be precisely what the Fed does to "save" the economy – even if it ends up causing more problems. I've said before that the central bank is the undisputed king of "fighting the last war."

The government's latest posturing won't do much to cure higher prices, either...

On Tuesday, the Biden administration said it plans to sell nearly 1 million barrels of gasoline from a government-managed stockpile in the Northeast. This will come just in time for the summer – starting between Memorial Day and July Fourth to ensure "sufficient supply flows... at a time hardworking Americans need it the most."

Timing aside... the move is more for political points than anything else. U.S. refiners can produce millions of barrels of gasoline per day. Selling off this stockpile is literally a drop in the bucket for supply.

To be clear, this isn't oil from the Strategic Petroleum Reserve, which is an oil stockpile stored at different sites in Texas and Louisiana.

This gas stockpile, located at sites in New York Harbor, Boston, and Portland, Maine, was created 10 years ago, after "Superstorm Sandy" left millions of people in the Northeast without fuel.

It turns out, the close of this reserve was included in March's government-funding bill. And the proceeds from the sale of gas will go to the U.S. Treasury Department, which certainly needs all the money it can get... though this, too, will be a drop in the bucket.

The gas will net around $100 million at recent future-market prices ($2.50 per gallon). Meanwhile, Uncle Sam's fiscal deficit is growing at around $9 billion per day and is on pace for nearly $2 trillion for the year.

So as a practical matter – other than leaving the Northeast without an emergency gasoline reserve – the move makes for a nice headline, but nothing else.

One more dose of reality before we end today...

Our colleague Mike Barrett, editor of our Select Value Opportunities service, recently wrote about the dangers of going "all in" on stocks right now.

Mike gave a powerful reminder to consider your investment timeline... while showing that U.S. stocks haven't always bounced back fast from "violent swoons" like they've been known to do in the past decade. That's why he says today's bull market may not be all smooth sailing...

The current state of the market, and the overall economy, is eerily similar to what we saw in late 2021... Evidence continues to mount that the economy is weakening amid persistent inflation.

And investors... are mostly ignoring it, in the hopes that further weakness will force the Federal Reserve to cut interest rates.

But weakness comes with a price. As Mike explained...

If upcoming economic data and earnings results disappoint analysts (which we expect they will), investors will have no choice but to lower their lofty expectations. This will push stock prices much lower, similar to what occurred in late 2021 and 2022.

So enjoy the new all-time highs we've been seeing... But remember, now isn't the time to let your guard down, either.

All the best,

Corey McLaughlin

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