Many are wondering if the new tax reform will benefit consumer spending.
Advance estimates of US retail sales for December 2017 displayed vibrant year-over-year growth of 5.64%, according to the US Census Bureau. The most recent report, released on Jan. 12, covers sales ex-food, automobiles, gasoline and building materials.
December sales growth was at its highest level since peaks in 2011 and 2014, and was above the trend seen since early 2011 — further highlighting strength in consumer activity.
Source: US Census Bureau, as of Jan. 12, 2018
Federal tax reform could benefit consumer spending
Looking forward, I believe that strength in consumer spending is likely to be underpinned by the recently passed federal tax cut, dubbed the Tax Cut and Jobs Act. (Harsh winter weather may be a caveat, however.) In fact, a number of companies have already announced employee bonuses and higher wages in the wake of this legislation.
Robust consumer spending is typically a friendly factor for the equity market, and may provide a reason to maintain equity exposure, in my view, despite high equity valuations seen over the past year and the lack of any significant market correction.
On a total return basis, the S&P 500 Index closed higher in every month of 2017, while its forward price-to-earnings (P/E) ratio is at 18.6 — a level last seen in the technology bubble of the early 2,000s.
Related: How to Invest in the Perfect S&P 500
Quality factor exposure can potentially harness strength in consumer spending
Investors who want to gain exposure to high-quality companies that can benefit from higher consumer spending may want to consider the quality factor. Consider, for example, that the S&P 500 Quality Index has 27% exposure to the consumer-focused sectors, with 12% of its holdings in consumer discretionary shares and 15% in consumer staples.
Related: ETFs to Capitalize on in Shift of Consumer Spending
Although the consumer staples sector can at times be viewed as defensive, this isn’t always the case. Consumer staples holdings within the S&P 500 Quality Index include Costco and Walmart, which are both influenced by consumer spending.
Other key exposures rest in industrials (23.5%) and information technology (22.5%).
These two sectors have the ability to benefit from strong economic trends as well. Moreover, within information technology, the S&P 500 Quality Index holds Visa and MasterCard, with just over a combined 9.0% exposure.
Both of these companies can benefit from strong consumer spending via their transaction-based businesses, which facilitate consumer purchases.
One of the potential benefits of the quality factor is the selection of stocks that have strong balance sheets. In this case, the S&P 500 Quality Index selects stocks based on return on equity, leverage and earnings quality via accruals.
Investors interested in the quality factor may wish to consider the PowerShares S&P 500 Quality Portfolio, which tracks the S&P 500 Quality Index.
This article has been republished with permission from Invesco Powershares.