Our conversation now with Bilal Little, global ETF strategist with direction Bilal. Good morning. I'm sad you're not with me at the desk today. You're in Houston.
Oh trust me I'm sorry right now. I am I'm sad as well.
Um, so I want to start with the consumer. That chart that we just showed was pretty extraordinary consumer sentiment now lower than it was at the start of every US recession going back to 1978. And as we saw in that chart of the week, consumers yet are still spending. So how do you explain that disconnect between how badly people say they feel and then actually how they're behaving with their wallets?
Yeah. Kristin. Good question. I mean, the truth of the matter is, um, investor confidence is extremely fragmented, and they've become extremely selective with how they decide to either allocate capital as well as spend given, you know, what's needed. The one thing that I like to point out about this chart is, look, this is not a call saying like, you know, we're entering into a recessionary period.
But what it does show you is that the end investor is strapped. And I want to point to a couple of different things here. Look, we've had six recessionary periods going back to 1978, and this is just looking at the first month of what would possibly be a recessionary period. But you just see that consumers are extremely, um, wary right now.
And I think the word consumer is just a microcosm of what's actually happening underneath the entire equity market. So, uh, this should be something that all investors should be watching going forward.
So I'm curious then, do you think that the sentiment is giving us, you know, a false signal about the health of the consumer? How long can that disconnect really last?
No, I don't think it's a false signal. If anything, I think it's actually a telling signal. And here's the reason why. If you start to look at where capital is being allocated today, year to date, over $100 billion has gone into aggregate bond ETFs and or funds. That's a very telling sign because that's the psychological hurdle, right.
Most investors are going to look at when the ten year is paying you five and a quarter at this point in time. In addition to that, money market funds, both institutional and retail, are sitting over $8 trillion. That's dry powder. But investors are now being compensated to hold the front part of the curve.
Those two, um, themes for me are telling you that the rate environment is real and it is the core driver, along with oil and energy prices.
All right. So let's get into consumer discretionary because you have a chart here. And for anyone that's not sure about what consumer discretionary is, that's essentially the things that you want that side of the economy or the purchases that, you know, people can essentially delay or skip. You're laughing.
You're laughing at us right now, but what is the market telling you about the consumer's willingness to keep spending on things that they want, but don't necessarily need?
Yeah, exactly. So this is a really good chart. And I like to point to these because if you look at consumer discretionary versus consumer staples you actually start to see a disconnect. Apologies. You actually start to see a very important disconnect. And the disconnect is this one. When you look at where that additional capital goes right now from the discretionary component.
It's going to pay for higher energy prices across the board. And that is seeping down to the end. Investor. I mean, I was just in the car with an Uber driver and the Uber driver sitting there telling me like, look, I bought a new car. I'm thinking, I'm going to charge a premium for my service and for my clients.
But the challenge is most of my additional capital now goes to cover energy costs. So one, I would be very mindful of saying, how is the consumer spending that additional capital. And I would watch where the discretionary names continue to go from here. Going into the fourth quarter, because we're entering into a seasonally important time of year, it's when most retailers actually pick up most of their flows.
But more importantly, this is the time where people travel to be with families and they actually decide where they're going to make some very tough decisions as far as spending money.
All right. So now let's talk about consumer staples because we also have that chart. And that would be if discretionary is the wants then we can obviously think about staples as the needs. So thinking about those two together talk to us about what that what you're seeing there for from the investor and a possible rotation.
Because as you said, that the consumer is not necessarily stopping spending, but they are getting more and more segmented.
Yeah. So they're being selective. Right. And I think that's where you you highlighted it perfectly. What are the needs and what are the wants. And this is why I love ETFs. ETFs get to tell you that unique story in the in the in the context of flow. So if you actually looked at both charts and you can overlap both charts if you go to ETF central.com and you can actually see the comparison over the last couple of weeks, you see consumer discretionary actually start to trend down while you see consumer staples actually start to trend up.
Again, this is the wants versus the needs. Which means when I'm going to tighten my belt, what can I not afford to spend versus where will I spend. And that also speaks to a stronger theme. I think underneath the market where this market is, is extremely narrow. When you look at where the flow is going. You have a handful of names that's continuously driving up the Nasdaq as well as the S&P.
While the vast majority of those names are actually trending lower, reaching newer lows and less companies reaching higher highs. So this is a telling story for both the consumer as well as the market confidence.
Really quick before we had to break. And I know you're sticking with us. If people are still spending, do do investors really need to get that defensive? I mean, are you saying that essentially that it's the better trade to to stick more with essentially, I guess, staples, if that's where the rotation is going?
So good question. I would say one investors should stay invested in equities, but they should be selective about where they want to allocate. And that's what obviously you're going to continue to have that conversation today. In addition to that you have to think inflation is sticking around at this particular point in time.
And if I'm not a betting man, but an investor thinking about what it looks like, I would take a barbell approach. I would have some of my capital allocated to the front part of the curve, where I don't have to take on a lot of equity risk, but then I would actually probably broaden out my diversification, although we've seen a nice rotation back into the magazine, and as those names over the last, um, month have performed, well, relatively speaking, to the broader index, I would be very mindful to spread out that equity risk.
All right, Bilal, a little of direction is going to be.
