What Happens When Excess Savings Run Out?

July 5, 2023

The market is trending higher for now, but something is brewing below the surface that could put an end to the bullish euphoria.

Since the onset of the pandemic recession, households rapidly accumulated unprecedented levels of excess savings relative to previous recessions. Government spending after the pandemic shot up more than in previous recessions, but new data is showing that the excess of US savings could be gone by the end of this year, and that would dry up some of the liquidity we’ve seen in the markets lately.

The Federal Reserve Bank of San Francisco reported that fiscal spending grew more in 2020 after the pandemic by some 35%, eclipsing the previous recessions.  That’s partly why we’re in the inflation mess we’re in right now. 

The market has rebounded nicely in 2023 as Americans continue to spend excess savings, and that money has been pouring into the big names we’re familiar with.  People are spending their excess at Amazon, Best Buy, Target, Wal-Mart, and others.  That helps other companies like Meta and Alphabet, which specialize in targeting advertisements. 

The issue is that the well has run dry.  We now have drawdowns of excess savings that place personal savings below the pre-pandemic trend.

With consumer debt on the rise and a shrinking cash flow problem that no one is talking about, we could see a rough second half of 2023.

Don’t get me wrong, the S&P 500 is still on a move higher and on its way to challenging the April 2022 highs, if not on its way to challenging all-time highs set in December of 2022.

My question is where will growth come from to drive this market higher? Artificial intelligence? Manufacturing? A semiconductor war between the US and China? An actual war between Russia and Ukraine? A government that is more interested in retaliation politics than building a nation?

Earnings season will be picking up soon enough and CEOs and CFOs will need to answer that simple question – where can they pick up value? We’ve already had a quarter where earnings estimates were lowered so companies “beat” estimates that way.

Will it come from layoffs that will push the country into a recession? Will earnings estimates be revised lower once again?

We may skate by this time around, but I think September 2023 will be a good test to see how resilient this market is. Until then, don’t fight the tape and keep trading with the trend.

One trade that I’m looking at today is AIG – American International Group.

The stock has been in a solid uptrend since mid-March and has recovered from some of the financial crisis that was prevalent in weeks past. The stock has crossed over its 50-day and 200-day moving average.

If you’re more aggressive, you can trade the 18 AUG 57.50 / 52.50 put credit spread for around 1.22 per spread. With the stock trading at $57.71, the 57.50 put is at-the-money, but this trade has 44 days until expiration to keep moving higher. The trade will be profitable as long as AIG stays above the short put by expiration.

I don’t like to place stop losses on option spreads, but I’d keep a very close eye on the trend line that I drew on the chart above. A break below the trend line and it’s time to get out.

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 

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