Schwab Sector Views: What is the State of U.S. Consumer Spending?

Schwab Sector Views is our three- to six-month outlook for 10 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks.

After weak economic growth at the beginning of 2016, all eyes are fixed on the U.S. consumer. The consumer is really the heartbeat of the domestic economy, and is also vital to pumping life into other economies around the world. So as we head into summer, how is the U.S. consumer faring?

Recently, it’s been a very mixed picture. Earnings season releases have revealed some disappointing results from traditionally stalwart retailers, with many noting a soft spending environment and a seemingly nervous consumer. However, the April retail sales report showed sales rose a robust 1.3% at the headline level, and sales excluding autos and gasoline rose a solid 0.6%. So what gives?

Signs of a healthy consumer?

Signs of a healthy consumer?

Source: FactSet, US Census Bureau. As of 5/23/2016.

This is where digging into a report can reveal a little more information. Within the report, we see that department store sales rose only 0.3% month-over-month (m/m), and actually dropped 1.7% year-over-year (y/y). Further, we see that clothing prices dropped 0.3% m/m—which was the second monthly drop in row. So where is the seeming strength coming from? Well, it won’t be a big surprise to most readers that non-store retailers (the archaic government name that encompasses online retailing) rose 2.1% m/m and a robust 10.2% y/y. So part of the reason for the disconnect between major retailers’ earnings reports and the retail sales number can be attributed to the shifting way that consumers are choosing to make their purchases.

But wait….there’s more! (Couldn’t help an old infomercial reference.) It’s not just how they are spending their money that seems to be shifting, but on what. We’ve noted before that it seemed that consumers were looking to spend more on experiences than on tangible goods. Many of those types of items aren’t included in the retail sales number, which means that report is likely underestimating the amount of consumer spending going on. For example, spending on hotels, concerts, airfare and sporting events are usually not counted in the report. Additionally, government reports haven’t seemed to keep up with the so-called “sharing economy,” which includes car services, house and condo rentals, and many other transactions occurring in non-traditional ways. The numbers we do have appear to back up the theory of consumers moving more toward experiences, with real spending (adjusted for inflation) on travel and leisure rising 4.4% in 2015, according to the Department of Commerce.

It appears to us that major retailer reports are painting an overly negative picture, but that doesn’t mean they should be ignored. The consumer is healing, but appears to remain affected by the financial crisis of 2008. Consumer confidence improved last month, according to the University of Michigan consumer sentiment index, and wages have started to show signs of improvement.

Wage increases should help bolster consumer spending

Wage increases should help bolster consumer spending

Source: FactSet, U.S. Dept. of Labor. As of 5/23/2016.

One of the biggest changes since the financial crisis has been the unwillingness of consumers, or inability, to add to consumer debt. Consumers burned by borrowing on their houses to finance ever-growing spending levels seemed to gain a dose of discipline—either by choice or by force—leading to more tepid spending growth.

Consumer appetite for debt has decreased

Consumer appetite for debt has decreased

Source: FactSet, Federal Reserve. As of 5/23/2016.

There are signs this is changing, however, as the Federal Reserve reported that April consumer revolving credit (which includes credit cards) rose $11.1 billion, the largest rise since 2001. But it’s not likely to change overnight.

Given the mixed picture painted above, what does it mean? To us, it means the consumer continues to heal from the financial crisis, but is in pretty good shape for the time being. Consumer spending appears to be in line with modest U.S. economic growth, but that doesn’t mean that the coast is clear for the consumer discretionary sector. In our view, retailers will continue to fight for market share in an increasingly competitive environment, with the in-store experience becoming a more vital part of the traditional retailer—likely meaning higher costs for a time. Retailers who make the shopping experience enjoyable and different stand to succeed in this environment, in our view, but those who try to maintain the status quo probably will struggle. Times have and will continue to change, but we believe the American consumer will continue to spend, even as the methods and mix of spending evolve.

Schwab Sector Views: Our current outlook

Sector

Schwab Sector View

Date of last change to Schwab Sector View

Share of the
S&P 500 Index

Year-to-date return as of 05/24/2016

Consumer discretionary

Marketperform

07/17/2014

13%

0.73%

Consumer staples

Marketperform

05/07/2015

10%

4.86%

Energy

Marketperform

11/20/2014

7%

11.69%

Financials

Outperform

05/07/2015

16%

-0.66%

Health care

Marketperform

12/13/2012

14%

-1.88%

Industrials

Marketperform

01/29/2015

10%

4.66%

Information technology

Outperform

04/29/2010

21%

0.78%

Materials

Marketperform

01/31/2013

3%

8.85%

Telecom

Underperform

09/12/2013

3%

11.83%

Utilities

Underperform

05/23/2013

3%

12.61%

S&P 500®  Index (Large Cap)

 

 

 

2.49%

Source: Schwab Center for Financial Research and Standard and Poor's as of 04/29/2016.

Clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations.

What is Schwab Sector Views?

Schwab Sector Views is our three- to six-month outlook for 10 stock market sectors, which are based on the 10 broad sectors of the economy.

The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:

  • Outperform: Likely to perform better than the rest of the market.
  • Underperform: Likely to perform worse than the rest of the market.
  • Marketperform: Likely to track the broad market.

How should I use Schwab Sector Views?

Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor's 500 allocations to each sector, listed in the chart above, as a guideline.

Investors who want to make tactical shifts in their portfolio can use Schwab Sector Views' outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.

Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. When it's time to make adjustments, Schwab clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks.

Next Steps

Talk to Us
To discuss how this article might affect your investment decisions:
-          Call Schwab anytime at 877-338-0192.
-          Talk to a Schwab Financial Consultant at your local branch.

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