“The news of my death was greatly exaggerated.”
Not unlike Twain, who reacted to his reported demise in a London newspaper in 1887, the American consumer has been declared figuratively dead throughout the grinding economic recovery begun in 2009. Consumer spending, approximately 70% of GDP, has been and remains a major catalyst driving stock prices. Housing bottomed in 2011 and its growth in 2012 into today is reflected in renewed consumer’s confidence and restored the wealth effect. Most recently, the employment outlook improved with a monthly average of over 200,000 private new jobs generated this year through April. Job creation is the most significant variable for housing and retail sales and should provide impetus for continued consumer spending as we approach the second half of 2013. Retail sales reported today were higher than expectations, rising 3.7% above April 2012. This follows weak sales in March.
To fully understand the potential of this virtuous circle for post-QE growth we examine the interaction of the job market, housing, retail sales, and stock prices using the S&P. Comparing the S&P 500 to these major sectors we can get an indication of potential relative sector performance resulting from consumer spending. Certain high-yielding individual stocks such as AAPL, EBAY, MA, and V are consumer related, but are classified information technology and are not included in these comparisons.
Beginning from the market bottom, when the proverbial stake had been driven in the heart of all consumers, the S&P 500 has risen 138.3% while the Consumer Discretionary ETF (XLY) climbed 276.5% through May 10, 2013. Despite a softening in economic data during February and March 2013 the S&P 500 is up 14.6%, meanwhile the XLY rose 20%, the Retail ETF (XRT) up 22.7% and the Homebuilder ETF (XHB) climbed 19.9% from year-end 2012 through May 10, 2013.
The tools of transition for the consumer away from QE are subtly coming into play. A foundation of consumer confidence is building, providing the underpinning for further advances in earnings for consumer related stocks. In fact, our proprietary research of 115 consumer stocks shows an increase of 14% in 1Q2013 earnings over the same period last year, well-above the 5.2% for 92% of the S&P 500 capitalization reported.
Our investment strategy remains a full position in equities. The run-up since the beginning of the year and a more bullish sentiment for equities opens the possibility of a correction. However, the impact of Fed expansionary policy on asset values has more than offset any definable correction to date. Longer term earnings growth should accelerate later in the year as private economy growth accelerates. Along with a dose of inflation this may be the ultimate catalyst for a sustainable bull market and deficit reduction.