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The American consumer is in trouble: Wells Fargo

Talking Numbers

Gina Martin Adams discusses why Wells Fargo is downgrading consumer staples stocks.

The American consumer is expected to have one of the worst years of disposable income growth in the last half century, says Wells Fargo Senior Analyst Gina Martin Adams.

Martin Adams' forecast doesn't just mean the US consumer is in trouble. It also means their consumer staple stocks – food, tobacco, and household products – may have a difficult year. For that reason, she has downgraded the entire consumer staples sector to "underweight".

(Read: Debt ceiling battle may overshadow earnings)

In her most recent report, Martin Adams writes:

"[Consumer] Staples earnings revision momentum dropped at a rate seven times as fast as the S&P 500 over the last three months, and we suspect further downward pressure to continue with U.S. consumer disposable income growth hovering near 50-year lows, and commodity prices on the verge of deflation."

Over the last three months, disposable income growth fell to 2.4%, the lowest it's been since in the last 50-years excluding the financial crisis in 2008-2009. Lower disposable income growth means lower sales growth for consumer staples (According to Martin Adams, a 1% growth rate in disposable income means a 1.3% increase in staples revenues). Martin Adams also says that the temporary increase in food stamps set to expire on October 31 leave "1 in 7 Americans with 5% less in monthly benefits starting next month."

(Read: Social Security raise to be among lowest in years)

Besides the negative effects of lower income growth, Martin Adams says consumer staple will also suffer with potential food price deflation and volatility in the US dollar relative to emerging market currencies.

Martin Adams also has one of the most negative outlooks for the S&P 500 on Wall Street – she believes it will fall to 1,440 by the end of December. The index closed Friday at 1,703.20, so such a drop would mean a 15.5% drop by year's end.

What does the growing divergence of the upper income from the middle and lower income levels mean for consumer stocks?

Watch the video above to see Martin Adams on what's next for consumer staples stocks and the market as a whole.

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