Consumer Discretionary Sector Rating: Marketperform

Fundamentally, the state of the American consumer remains healthy—unemployment is near historical lows, wages have risen modestly, consumer confidence remains relatively high and interest rates have fallen this year, which makes borrowing cheaper.

However, the business cycle—which traditionally rotates through early/mid/late stages, then recession, before starting the cycle over again—appears to be in the late stages. Historically, this has been a relatively weak point in the business cycle for the Consumer Discretionary sector, which tends to outperform in the early stage.

Also, new U.S. tariffs scheduled to take effect on Chinese goods later this year will have a greater effect on consumer goods than previous tariffs did, which may increase consumer prices, in turn hurting sales and pressuring profit margins within the Consumer Discretionary sector.

Meanwhile, the spending mix is shifting, with online sales growing much faster than traditional department store sales,¹ while consumers also have shifted their spending habits relative to what they were before the Great Recession. In addition, price competition has created a tough environment for many retailers, paring weaker performers from an overcrowded space.                                      

Overall, the American consumer’s mood is optimistic, but we’re on guard for a potential softening of that mood if business leaders’ cutbacks on capital spending broaden into cutbacks on labor. Some recent purchasing managers’ index (PMI) data have shown some labor market deterioration within the services sector, following what had been weakness concentrated in manufacturing. This is an important factor to watch to see if a trend develops. For now, we maintain our marketperform rating.

¹ Source: U.S. Department of Commerce, Quarterly Retail E-Commerce Sales, 2^nd Quarter 2019, reported 8/19/2019.