First quarter earnings have been blowing Wall Street expectations out of the water. So why is the stock market not responding like its supposed to? The general opinion seems to be that investors are still skeptical about the profitability outlook and economic stability of the U.S. market. The problem is that the growth of the nation's economy hinges on consumer spending, and consumers are becoming more miserable by the day. That is, at least according to the Misery Index, an economic indicator that combines the inflation rate and the unemployment rate. The Misery Index currently sits at 11.48.
Despite the housing market and employment data have shown some signs of improvement, and discretionary income has also seen a rise. So, why are consumers still feeling the squeeze?
Consumers Crunched by Inflation
The culprit seems to be inflation, and whether or not the Federal Reserve wants to admit it, the dollar's decline has become a huge concern for investors and the economy as a whole. But the Fed has reiterated that the core inflation rate is still within its target of about 2 percent.
The problem there is that core inflation does not account for rising food and fuel prices, which are spiking quite drastically and consumers are getting pinched. This is alarming because cash-strapped consumers don't have the ability or desire to spend, which translates to lower corporate earnings, which means investors aren't happy, and that leads to stock prices falling lower.
Misery Index and Consumers
The Misery Index, created by economist Arthur Okun, was a popular economic indicator used to gauge the nation's financial health. By adding the Consumer Price Index with the nation's unemployment rate, the Misery Index is intended to show how challenging or prosperous the U.S. economy is for consumers at a given time. The higher the index is, the worse the economic situation is for the American people. The all-time high of the Misery Index occurred in June 1980 when it reached 21.98.
The Misery Index for the most part dropped from relevance during the 1990s until it returned to double digits during the recession in 2008. Though it has been declining for over a year now, the sudden spike in March has once again brought the Misery Index back into headlines. And as experts have noted, the primary cause is the rise in inflation.
Consumer Stocks Outlook
Paper products giant Kimberly Clark (NYSE: KMB) sent a clear message to investors and Wall Street recently when it lowered its profit outlook because of rising material costs. To counteract the rise in materials, the company plans to raise prices for its products, which include Scott and Cottonelle toilet paper, Kleenex and Huggies diapers.
Pepsico (NYSE: PSP), which is supposed to announce earnings later this week, expressed anger at the Fed's strategy of focusing on core inflation while food costs skyrocket. Given that Pepsi's primary products are considered consumer luxury items, it only makes sense that the company is unhappy with discretionary income shrinking.
Proctor & Gamble (NYSE: PG), a major bellweather in consumer behavior, is also slated to release earnings this week. The company has been planning around higher costs by aggressively growing market share. P&G plans to make up growth in some markets by providing low margin and low cost goods to consumers but at high volumes. Think of it as the Wal-Mart (NYSE: WMT) strategy. In other markets, like the U.S., it plans to raise prices of products like Charmin toilet paper, Bounty paper towels and Pampers diapers.
Other major consumer products makers getting attention from Wall Street include Palmolive-Colgate (NYSE: CL), Unilever (NYSE: UL), Coca Cola (NYSE: KO), and Kraft (NYSE: KFT). Companies like McDonald's (NYSE: MCD), Yum! Brands (NYSE: YUM) and even Chipotle Mexican Grille (NYSE: CMG) will also have to balance rising costs versus keeping prices attractive to consumers.
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