According to Gallup, consumer spending dropped 15% from mid-August and it has been flat since the Federal Reserve’s tapering talk in May. Casual dining expenditures declined 3.5% in July as well as 2.0% in June. Meanwhile, Warren Buffett has been rapidly exiting stocks that are tied to consumer purchasing activity.
Many market watchers recognize that there has been enormous strength in big-ticket consumption like auto and home. However, with wage growth stagnant, we’ve been making those acquisitions on credit with Fed-manipulated lending rates. And those lending rates are moving noticeably higher as the Fed prepares to pull back from its bond buying intervention.
It follows that consumer-oriented stocks may be in a bit of a bind. Rising rates will not make big-ticket items easier to acquire. Similarly, the absence of personal income increases makes it difficult for consumers to fuel discretionary purchasing.
Consider the waning momentum of retail ETFs like SPDR S&P Retail (XRT). Until August of this year, SPDR S&P Retail (XRT) had been comfortably outpacing the S&P 500 SPDR Trust (SPY) as depicted in the price ratio below. For the last month, however, the XRT:SPY ratio has demonstrated relative weakness, by remaining below a key trendline. Similarly, the slope of the XRT:SPY 50-day moving average has declined steadily since June.
Not a chart fan? Then consider the fundamentals. The Forward P/E for XRT as well as for SPDR S&P 500 Sector Select Consumer Discretionary (XLY) both hover near 19. Of the 9 S&P 500 sectors in the SPDR series, consumer discretionary is the most expensive.
Truth be known, no segment of the economy will thrive in a broad market correction… and we’re certainly due for something with a bit more bite than 5%. That said, with two-thirds to three-fourths of the U.S. economy dependent on household consumption, it’s no wonder that Wall Street is addicted to ultra-low rates; Americans must keep borrowing to eat cake because significant wage growth is unlikely to occur anytime soon.
Gary Gordon is president of Pacific Park Financial, Inc.