Consumers forgetting to spend?
Given the pressure on exporters and the recent strength in the labour market, it would seem reasonable to focus on companies selling to US consumers. After all, not only are more jobs being created, but in this case, a stronger dollar is a benefit in that it extends purchasing power to US consumers. Unfortunately, the reality is not matching the thesis.
In fact, retail sales are struggling, with February being the third consecutive month in which US retail sales fell. Even after stripping out volatile factors––such as food, autos, gas and building materials––retail sales were still flat.
Bad weather probably played a part, which helps explain why online sales were up over 2% as shoppers bought at the keyboard, but tepid income growth shares a large part of the blame. Nonetheless, with US consumer discretionary companies outperforming the rest of the market year-to-date, this sector may be vulnerable if sales do not start to accelerate, particularly as it now has the second-highest valuation (behind health care) of any of the 10 broadly recognized economic sectors.
We upgraded our view on US consumer discretionary stocks last fall. We would still argue that households are in a better position than they were just a few years ago: Consumer debt is down while household wealth is up, gasoline prices are much lower than a year ago and the US is creating jobs at the fastest pace since the 1990s.
However, US consumers are not yet playing to script. While household consumption was strong in the fourth quarter of 2014, it is off to a weak start in 2015. At the same time, consumer stocks have rallied on hopes for a spending rebound. If it does not materialize soon, it may once again be time to pull back from this sector.