Displaying items by tag: consumer spending
Now that many signs are pointing to an improving US economy, some investors think it is time to shift out of growth stocks and into more cyclical sectors. That said, cyclicals—which rely on consumer spending improvements—are going to be a hard place to invest because of the highly variable recovery path for different sectors created by COVID. With that in mind here are a few places to look: transportation (excluding airlines), such as the iShares Transportation ETF (IYT); or infrastructure, like the Global X Infrastructure Development ETF (PAVE); ecommerce and home entertainment, such as the Amplify Online Retail ETF (IBUY); or housing, either through single names like Home Depot and Lowe’s, or a broader homebuilders ETF like the SPDR S&P Homebuilders ETF (XHB).
FINSUM: We find homebuilding to be a very interesting opportunity. One of the reasons that the real estate market has held up is that homebuyers are typically those higher on the socio-economic ladder, whose incomes are much less likely to have taken a hit from the pandemic. Therefore, the growth trajectory for that whole sector looks strong.
The New York Times has published an interesting piece this week which argues that markets and investors are ignoring an ugly and disastrous reality: that the economy is suffering a huge and largely unprecedented collapse in demand. New data out of Europe and Japan, as well as US manufacturing demand, this week showed that demand fell sharply in May, a sharp contrast to the employment jump. The NYT argues that this systemic fall in demand will take time to play out, but that the huge decline in employment and change in behaviors will cause a rupture in demand that will play out over years.
FINSUM: The NYT piece is very bearish. We held off on covering it until new data was released overnight showing a big fall in demand.
The markets are not reflecting it, but sometimes it feels as though the writing is on the wall. The economy is bound to get worse before it gets better. We have been locked down long enough now that consumer habits are shifting and the spending patterns that prolong recessions are taking hold. Total US credit card debt has fallen 5% in five weeks—the fastest fall since the Great Recession. Auto loans are the same. On the whole, the more data comes out, the worse the picture gets.
FINSUM: Job losses have not yet peaked, so we are not even close to being on the road to recovery. We suspect it is going to take a long time to get back to where we were in February. We expect this will be a very wide U-shaped recovery.
Quick quiz: what is the pillar of this bull market? Unless you answered “the US consumer”, you probably are not getting a passing grade. Therefore, any dents to the teflon-coated US consumer are very worrying, and that looks like the road we are headed down. New consumer spending data is in and it is poor. Spending at gas stations, on cars, and on home materials was considerably weaker. The overall boom in spending now appears to be over as we head into the winter, which could prove to be more than just meteorological.
FINSUM: There is good news and bad news. On the downside, this means that consumers may no longer be able to shoulder the load of carrying the economy. On the positive side, this could lead to rate cuts by the Fed, which the market would love, at least in the short-term.
With the Fed coming in less dovish than expected this week, there is suddenly much more anxiety in the market. Without a clear direction on rates, and with lingering worries about the economy, the outlook for stocks and bonds is not clear. And as we all know, markets hate uncertainty. Accordingly, the search for the best recession-proof stocks continues, and we have a new proposal today: fast food stocks. As consumer spending falls in a recession, bargain-providing companies, like fast food, often do well. The sector also provides healthy dividends. Take a look at the usual suspects: McDonalds, Wendy’s, and Chipotle, and some you may not have thought of, like Cracker Barrel and Restaurant Brands International.
FINSUM: The “Dollar menu” suddenly becomes very attractive to the American consumer when times start getting tough. These stocks seem a good bet, especially because they have solid dividends, which should provide some protection in case a downturn doesn’t happen.