Smoky Skies

An ominous haze and the acrid smell of distant wildfires blanketed the Bay Area skies this week. Unhealthy air quality evoked memories of past wildfires, and some residents opted to stay indoors or cancel plans until the skies cleared. Despite the current blazes being hundreds of miles away, it has been hard not to feel a sense of unease.  

Much like these smoky skies, financial markets often present us with seemingly distant risks that loom on the horizon. While these risks often capture our attention, and cause tangible impact for specific companies, industries, or regions, they rarely warrant making significant changes to a long-term portfolio strategy. 

Much like the smoke-filled skyline, ongoing work stoppages and high-profile negotiations over labor deals make it difficult to see when the air will clear for thousands of workers. The Writers Guild of America, which represents 11,500 screenwriters, along with the Screen Actors Guild, have been on strike since May in an attempt to settle issues around more equitable compensation from streaming services and the impact of AI on their profession. This strike has sent shockwaves through the entertainment industry and has delayed the production of multiple TV shows and films.  

The most prominent strike underway is the United Autoworkers Union, which is impacting the big 3 US auto manufacturers – GM, Ford, and Stellantis (maker of Chrysler and Jeep). While the media coverage has been significant, the actual production impact has been more limited. So far, the three companies have only missed production of a small fraction of planned vehicles from the closures and had a limited impact on the bottom lines – roughly 0.1% of quarterly revenue.[1] Negotiators have been meeting all week, but publicly, both sides have reported little progress toward bridging what they have described as a significant gap in proposals on wage increases and worker protections. 

There is an incentive for both sides to reach an agreement in the labor disputes, and that is ultimately what will happen. While the impact of labor strikes can be material for individual companies and employees, they are unlikely to directly impact the broad economy beyond the short term. For investors, the most reliable strategy is to ignore the short-term noise and maintain a diversified portfolio allocation. 

Another area where investors are smelling some smoke and assessing potential risks is consumer spending. Households built up a buffer of excess savings during the pandemic, and that enabled the consumer spending that fueled the economy over the past 18 months and staved off recession concerns. However, the San Francisco Fed estimates that excess savings that were built up during the pandemic will likely be depleted during the third quarter of 2023 – that is, the current quarter.[2]  

Patterns are emerging that corroborate this prediction: the pace of consumer spending has slowed in recent months, credit card delinquencies have been rising, and spending is shifting toward discount retailers as inflation and higher gas prices continue to squeeze household budgets.[3] 

As retailers have reported earnings over the past month, investors have been closely scrutinizing these shifting trends. There were some bright spots, especially amongst discount retailers like Ross, TJ Maxx, and Walmart, which all saw increased sales in the most recent quarter. However, other retailers, including Macy’s, Target, and Dick’s Sporting Goods, shared concerning trends of decreasing consumer spending, increasing losses from theft and credit card delinquencies, and excess inventory that is dragging down profitability.[4]  

While all three companies slashed their profit forecasts for the coming year, these shifts underneath the surface of the retail industry are less of a concern for diversified investors who own companies across multiple industries and geographies.

While it’s natural to feel uneasy when short-term risks such as wildfires or weak corporate earnings cast a shadow over the financial markets or local skylines, history reminds us that these risks will pass with time. Instead of feeling the need to make adjustments to your long-term portfolio strategy, we recommend using these temporary risks as a good reminder to revisit your emergency plan – confirming you have the right amount of liquidity and that you are prepared for a fire closer to home.[5] 

For our clients, we build portfolios that prioritize resiliency, even when the landscape is shifting, and smoky skies offer a reminder of risk. Financial shocks are a natural part of being a long-term investor, yet there are also periods of steady growth like we’ve seen in 2023 year to date. With a combination of patience and proactive planning, we have a strong conviction that whatever the pattern of market movements, the long-term path of asset growth will be positive.

Resources
1. UAW Poised to Expand Strike to More Auto Factories WSJ 
2. Excess No More? Dwindling Pandemic Savings Federal Reserve Bank of San Francisco.
3. Delinquency Rate on Credit Card Loans St. Louis Fed 
4. Dick’s Sporting Goods, Macy’s Flash Warning Signs on U.S. Consumer Spending WSJ 
5. Additional tips about Firewise Planning: https://northberkeleywealth.com/articles/firewise-planning