People have been under-estimating the consumer and her ability and interest in persistent spending for decades. Occasionally, the consumer gets off-sides and gets over-leveraged and is forced to re-set the household balance sheet (housing in 07-09 and tech stock leverage in the late 90’s) but generally, consumer spending just keeps chugging along. Witness the components of GDP, the green line is stable and something one might want to anchor their portfolio to.

72% of U.S. GDP is consumer spending so it’s a highly important factor in the calculation of GDP. The U.S. has historically been one of the most stable economies in the world, in part because the consumer spending phenomenon has been highly stable.

That makes a consumer spending investment portfolio the ideal CORE allocation when building a portfolio. That’s not my opinion, it’s just logic and common sense. If the bulk of all our portfolio’s are U.S. stocks and U.S. bonds, shouldn’t the CORE of the portfolio be something that tracks the real driver of our economy?

Consumer Spending, Retail Sales

This chart shows Retail Sales tends to trade in a range, we are at the lower end of the range which is typically a great time to add.

Here’s some great data-points from a great analyst at Hedgeye Institutional Research:

July Retail Sales – Confirming of the Consensus “Consumer Is In Good Shape” Narrative (published 8/15/2019):

• Headline Retail Sales: +10bps to 3.4% YoY – which was the fastest pace of growth since MAY ‘18

• Retail Sales Control Group: +50bps to 5.1% YoY – also the fastest pace of growth since MAY ‘18

• The YoY growth rate of Headline Retail Sales managed eke out a +10bps acceleration against concomitant accelerations of +40bps and +30bps in the 1yr and 2yr comps, respectively. Comps on a 2yr basis are essentially flat over the next few months before falling off a cliff in the DEC-FEB timeframe. Statistically speaking, that implies a stable goods consumption growth through late-Q4, followed by a sharp acceleration from Christmas through mid-to-late Q1 of next year.

• The YoY growth rate of the Retail Sales Control Group managed to post a +50bps acceleration against concomitant accelerations of +40bps and +60bps in the 1yr and 2yr comps, respectively. Comps on a 2yr basis are flat-to-up over the next few months, with implies stable-to-down core goods consumption growth through NOV. DEC could be a big print to the upside given the drop-off in the compares on a 1yr and 2yr basis.

All told, the “consumer is in good shape” narrative remains firmly intact post the advent of the JUL Retail Sales data. Investors should note that the absolute state of consumer spending is largely irrelevant to our rate-of-change process. But even analyzing the US consumer through a rate-of-change lens paints a picture of a two-speed economy that will likely avoid recession given the relative weight of consumer spending in the US GDP calculus. Queue the “soft landing” commentary in t-minus 6-9 months; that pending consensus narrative that is already implied by our NTM outlook for headline GDP growth.

Housing Should be a Winner:

All told, the confluence of easing base effects, hyper-supportive demographics, and improving affordability – which itself is already favorable relative to history – keeps the US housing complex on the list of our favorite intermediate-to-long-term ways to play what consensus will inevitably term a “Fed-engineered soft landing” once we’re finally on the other side of the ongoing #Quad4 “Black Hole”. The US consumer balance sheet remains as healthy as ever and has plenty of capacity to lever up – especially if both parties get creative with their promises from the campaign trail in search of a greater share of the growing millennial vote.

Equities are Hated, That’s Your Opportunity

• Flows out of active & ETF equities are enormous - people are scared to death about equities which makes them significantly more interesting now. Remember, people loved equities in January 2018 and September 2018, those weren’t generally very good times to add to equities. We now have the reverse scenario and when high quality goes on sale and no one wants it, it’s usually a wonderful time to begin adding more. Don’t shoot the messenger, BUY LOW SELL HIGH is still the way to win long term.

• Flows into perceived “safety assets” like bonds, alternatives, low vol equities are enormous and persistent. Largely these have performed well YTD as rates have collapsed. Rates can always go lower but the easy money has likely been made and these “safe assets” are now quite expensive relative to history. Most defensive equities are now more expensive than high quality growth stocks but they have little growth and levered balance sheets. Beware of the safety bubble, some of these assets will likely not be as safe as you believe.

• The consumer is strong and has plenty of consumption capacity from here. Most consumer stocks have under-performed for a year as fears of trade wars & increased prices from these tariffs have pushed flows away from the sector. If buying low and selling high or buying fear and selling greed are still prudent, and I believe they are a timeless strategy, then now is the time to be a contrarian and start adding back to the core brands driving consumer spending and loyalty. There’s some great sales currently, be greedy when others are fearful.

Remember, Consumer Discretionary stocks have historically outperformed the S&P 500 85% of the time versus the S&P 500. With that knowledge, don’t you want to be adding to an asset that’s underperformed on a rare occasion? Mean reversion is a wonderful phenomenon.