In a recent blog post, the White House highlighted the interconnectedness of consumer behavior and the U.S. economy, aptly noting that consumer spending is a significant determiner of economic performance. For income investors, understanding the health of the consumer market is pivotal as it significantly influences stock market outcomes. As consumers’ financial conditions improve, the potential for stock market investments, particularly high-yield closed-end funds (CEFs), may also rise. This discourse delves into the current state of the U.S. consumer, the implications for investments, and specific opportunities within the financial landscape.
A key factor influencing consumer spending in the United States is inflation, which remained a dominant theme in 2021 and led to a decline in stock valuations in 2022. The rising costs of commodities and services prompted consumers to limit their purchases, regardless of their financial standing. Nevertheless, as inflationary pressures stabilize and return to pre-pandemic levels, consumer confidence is beginning to recover. This revitalized confidence is indicative of an increase in discretionary spending, which is important for sectors heavily reliant on consumer expenditure, such as leisure and entertainment, suggesting a healthier consumer market capable of supporting further economic expansion.
The health of the consumer can also be gauged through household debt levels relative to disposable income. Current statistics reveal that the average U.S. household carries less than 100% of its disposable income in debt, creating a favorable scenario wherein households could potentially erase their debts in under a year, if hypothetically applied. This contrasts favorably with countries like Canada and Australia, where debt burdens are notably higher. The balance between consumer spending on discretionary items and manageable household debt positions the U.S. consumer in a relatively strong stance, which is crucial for sustainable economic growth.
With a robust consumer backdrop, corporate America is positioned to benefit significantly. Positive consumer spending translates into enhanced corporate revenues, which subsequently facilitates the growth of returns for shareholders through dividends and stock buybacks. In 2023, S&P 500 companies notably allocated over $800 billion towards share repurchases while distributing over $500 billion in dividends. For individual investors, particularly those relying on steady income from their investments, buying into diversified portfolios like the SPDR S&P 500 ETF Trust (SPY) remains a solid avenue, albeit one that offers lower immediate yields compared to options such as high-yield CEFs.
Among the higher-yielding options is the Liberty All-Star Equity Fund (USA), which specializes in investing in mid-cap and large-cap U.S. firms, including notable names like Apple and Microsoft. The USA fund provides an impressive yield of approximately 10%, significantly higher than what investors might receive from typical ETF investments. This translates into a more substantial average monthly paycheck for contributors, which is particularly appealing given current economic conditions. While high yields can raise questions about sustainability, historical trends indicate that such dividends have consistently risen alongside overall market performance, supporting a reliable income stream for investors.
In addition to the alluring returns, the Liberty All-Star Equity Fund trades reasonably close to its net asset value (NAV), suggesting stability backed by strong management and impressive yields. For investors interested in value purchasing, this may warrant placing the fund on a watch list. Given the shifting dynamics of the market, opportunities to acquire this fund at a discount may materialize. Analyzing consumer health, corporate earnings, and individual investment vehicles highlights a potential for robust income generation in the current financial landscape, guided by informed strategies that leverage market conditions effectively.
