The chart above is inspired by a similar one produced by Bloomberg and Bank of America. It shows the stock price of Dollar General, a low-end US grocery- and general merchandise retailer and the Italian sports- and super-car maker Ferrari, whose largest market is the US. The latter has gone from strength to strength, more than doubling its revenues in the last eight years as the wealthy snap up its pricey cars. Dollar General, on the other hand, has stumbled since early 2023, with its top-line revenues far slower than the nominal growth in the US economy.
This is perhaps as lower-income US consumers began to run dry of the extra income from Covid-era stimulus checks and have seen their incomes struggling to keep up with inflation. The company’s stock dropped a massive 32% two weeks ago on its latest earnings report. It noted in the earnings call that, while the number of customers remained steady at its stores, those customers showed signs of distress: ”The majority of them state that they feel worse off financially than they were six months ago as higher prices, softer employment levels and increased borrowing costs have negatively impacted low-income consumer sentiment.” This according to the company’s CEO, who also reported a rise in shoplifting and weak sales at month-end, when customers run short of cash before their paychecks are due. Of course, no story has a single dimension, and Walmart may be stealing some of Dollar General’s market share, but the point remains: America is extremely inequal and getting more so.
Theme of the week: America is the land of inequality
We all know that the US is plagued by high levels of inequality, but a look at the numbers is truly staggering.
According to the US’ St. Louis Fed, the wealthiest 10% of the country’s population has 67% of the country’s wealth, while the bottom half of American has a mere 2.5%. And even within the top 1%, the inequality is incredible: as
the average household wealth of the top 0.1% tops USD 1.5 billion. These numbers have generally only gone in one direction since the point of maximum American equality in the 60’s and 70’s. This is certainly one of the chief drivers of a very politically divided America, with the two political sides finding very different targets for their dissatisfaction with the status quo. The incredible wealth at the very top is also behind Democratic candidate Kamala Harris’
proposal to tax unrealised capital gains among those with USD 100 million or more in wealth. Historians will argue that widening inequality drives social unrest, so with the US society at is most out-of-balance since just before the Great Depression, what path does it take from here? Will policies move the US into more balance by lifting the poor and lower middle class or by taking down the ultra-rich?
The two presidential candidates differ on how they would address the needs of Dollar General’s customers, generally those that make less than USD 35,000 per year and at the bottom fifth of incomes. Trump’s tax cut proposals are irrelevant for the poorest Americans, as he focuses mostly on cutting corporate tax rates further. Harris has proposed that the federal minimum wage be hiked from USD 7.25 to USD 15 per hour, and would like to abolish the “sub-minimum wage” for tipped workers, like restaurant waiters, who are paid virtually nothing by employers and must earn from customer tips. The old minimum wage level is so low that only about a million Americans are paid at this level and many states have far higher minimum wages. A better proposal would be to index the minimum wage to inflation. A higher minimum wage, especially for tipped service workers would certainly be inflationary.
Key to watch this week: The Fed will cut rates this week – but by how much?
Last week, a prominent WSJ reporter, Nick Timiraos wrote a column suggesting it was highly uncertain whether the Fed would cut the interest rate by 0.25% or a larger 0.50% increment at this Wednesday’s FOMC meeting. Timiraos is the designated, if completely unofficial “Fed whisperer”, seen as the journalist the Fed would most likely leak information to if it was afraid that the market was reading its intentions wrongly. The article helped support sentiment in the stock market and shocked the US dollar lower, while gold rose to all-time highs.
Before this article and a similar one from the Financial Times published the same day, the market was nearly certain that, after recent mixed labor market data, the Fed would take things slowly this week with a smaller rate cut. Now markets are leaning in favour of the Fed cutting by a half-percent, but more important will be the Fed’s thoughts on how it sees the likely path of interest rates at future meetings. This meeting will also see the Fed refreshing its quarterly projections on where the US economy and its own policy rate is likely to head in the coming years. This sets up an intense interest in every future US economic data release and whether it agrees or disagrees with the market consensus on where the economy and Fed policy are headed.
Key to watch in the election this week: can anything really shift the odds?
This past weekend we had another apparent assassination attempt on former President Trump foiled by Secret Service agents during a round of golf, fortunately before any active shooting from the would-be assassin. This is unlikely to shift sentiment, and in general, the polls are extraordinarily tight and relatively stable. We are at a loss on what either candidate can do with seven weeks to go to shift voter sentiment.
See you next week!
About the author: John is Saxo’s Chief Macro Strategist, with over twenty-five years’ experience in the financial markets, chiefly as Saxo’s former Head of FX Strategy. He is also an American, having grown up in Houston, TX and has a long-standing passion for following the course of US elections and their place in history since being allowed to stay up late as a young kid to watch the 1980 election results roll in and Ronald Reagan winning the presidency over Jimmy Carter.
