For those of you who would prefer to listen:

We are in the heart of August and that means Back-to-School season is upon us. Students are getting ready to meet their new teachers with mixed emotions of both nerves and excitement for going back to school. In fact, some parts of the country have already started school. Parents are tasked with taking inventory and gearing kids up for heading back to class. This is no small feat, especially as consumers have seen their budgets stretched due to inflation.

Educating our kids is as important as anything we do and shopping for the return to school is big business. You may recall the American Consumer accounts for 70% of economic activity. Back-to-School Season for retailers is second only to the Holidays and can serve as a key barometer for consumer confidence. In a June survey, over 40% of back-to-school shoppers reported that they feel they are in worse financial standing than they were this time last year. At the same time, the National Retail Federation recently reported they expect total spending for back-to-school to top $40 Billion this year, which would be a new high. While consumers expect to spend more, they are getting less and looking for deals and discounts as inflation has taken a significant bite out of their buying power. Shopping for back to school is well underway as many started early to spread out these costs over the Summer months.

The American people were busy this Summer traveling, eating at restaurants, staying in hotels and traveling on planes. The consumer continues to spend more for less due to rising prices on just about everything. With the first days of school upon us, attention now turns away from vacation spending and toward a cartload of supplies for the school year. Students look forward to reacquainting with classmates with new stuff. 

KPMG did a survey of consumers to gauge back-to-school expectations. With inflation still top of mind for consumers, back-to-school shoppers anticipate they will spend 21% more per student compared to 2022. This works out to a spend of $377 per student this year. This increase in spending doesn’t mean shoppers will be buying more items, as the reason given by an overwhelming majority (82%) for the spending increase is that they expect goods will be more expensive. In fact, about half of back-to-school shoppers plan on buying fewer items compared to prior years to mitigate rising costs.

What are consumers stocking up on heading into the school year? Footwear, school supplies and apparel are the largest spend categories accounting for about 56% of total expected spend. Electronics and accessories are expected to round out the top 5 categories for back-to-school spending. This is consistent with the past few years.

People plan to visit the store more this season. Even though the irreversible trend toward online shopping continues, nearly 60% of back-to-school shoppers plan on doing their spending in-store. About 75% of consumers report they are concerned about inflation which will drive their behavior to look for early discounts in-store, over half will also look to buy cheaper brands and 42% will change which stores they shop in. Trading down is a trend for back-to-school this season. Significantly fewer households, 37%, will be shopping for luxury items this season, compared to 53% last year. Bargain shopping is back in vogue.

Today’s Consumer Confidence report by the University of Michigan shows that the US consumer is feeling less optimistic about the Economy. Gas prices, which are highly visible to consumers, have risen in recent weeks, which can weigh heavily on sentiment. Households with federal student loans are about to feel another significant pinch. Federal student loan payments resume this Fall after having been paused at the start of the pandemic. This additional expense will put further strain on the budgets of many US households. It is expected that these households will shift behaviors to lower discretionary spending, but they are likely to also put expenses on high-interest rate credit cards and cut back on spending across the board where possible. Student loan payment resumption can have a major ripple effect on consumer spending and beyond.

In the markets, we have seen stocks choppy with a noticeably wider daily range of late. There has been an overall downward bias since the late-July highs. We are now 90% through earnings season and revenues are basically flat versus a year ago. Earnings are down -8.26% over the prior year. This quarter is on track to be the worst earnings growth dating back to 2020. The Market is digesting earnings season right now. Many companies beat the low bar that Wall Street guided to last year but haven’t materially taken up guidance. With the run-up in prices this year and the absence of earnings growth, valuations are starting to become a problem, as articulated in our quarterly newsletter. Throwing in another wrinkle is the Bond Market. The longer-dated part of the Treasury curve, 10 and 30-year yields, have breached the 4% barrier on the upside. They are now yielding the highest rates since last Fall at 4.16% and 4.26%, respectively. Higher rates create a larger hurdle for capital deployment and return assumptions. This puts some pressure on equity valuations as well. The very large Treasury issuance taking place is absorbing a chuck of capital or liquidity in the investment markets. The Market is trying to figure this out. It will continue to be a process. The Market at end of Summer is grinding between fundamentals, valuations and low-volume trading which is typical for this time of year.

Have a nice weekend. I am gearing up for some back-to-school shopping with my kids, maybe you are too. I would love to hear what is on your list and how your experience goes. 

We’ll be back, dark and early on Monday.


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