US consumer discretionary riding (the) high(s)

Friday, 13th September 2019 10:17 - by Shant

Going into Friday's session, US consumer discretionary stocks are riding the crest of another wave higher, fuelled by a mix of fresh optimism of a trade deal between the US and China, as well as the prospect of lower rates to come - should the Federal Reserve oblige (as President Trump hopes they do).  That said, the US economy is also faring much better than the rest of its counterparts, and it is widely acknowledged that the consumer has been the key ingredient in producing the GDP figures which are currently the envy of the rest of the world.  The annualised growth rate in the US is currently 2.3% as of June 2019, compared to 1.2% in the Eurozone and 1.3% in Japan.  China is at 6.2% but it is widely acknowledged in the economic community that their metrics are somewhat questionable.

The disparity between the US and the Eurozone and Japan is - as noted above - down to consumption.  Export reliant economies are set for a hard time in the current climate and there is much to be said for internal/domestic demand, so much so that the UK is also holding its own in terms of growth (only just though), despite constrained investment due to the uncertainty of Brexit.  However, consumption is a fickle beast and tougher times in the real economy will impact on (consumer) spending, which as of yet, remains strong as unemployment remains at record lows.  This is why there is a greater emphasis on wage growth, and in relative terms, the annualised increase in earnings looks tame when compared to the level of employment in the US.  Despite the breakdown in the Phillps curve, which is largely down to globalisation, job security is adding confidence to the consumer, but at some point this will inevitably suffer - to some degree at least.  

On Friday, we get the latest retail sales figures in the US, which are forecasted to rise by 0.2% in August.  Ex autos and fuel sales are expected to rise by a modest 0.1%, but in both cases, we are coming off the back of a strong July where headline retail spending rose by 0.7%.  The retail sales control group, which is used to measure the Federal Reserve's favoured inflation measure - Personal Consumption Expenditure (PCE) - is expected to rise by 0.1% also, with July having seen a rise of 1.0%.  

So in light of the above, it is worth taking a look at the top consumer discretionary stocks, which as I have alluded to already, are trading at strong levels.  Top of the list is Amazon, however, in relative terms, we are some way off the all time highs posted in early July, when it matched the peak seen in September last year ahead of the Q4 sell off, which responded to the prospect of higher interest rates in the US.  Recall, the FOMC raised rates for the fourth time in 2018 at the December meeting.  Amazon was traded as high as $2045 at that time, and earlier this year, we hit a top of $2025.  Currently, the stock is trading just under $1850.  

Amazon's market capitalisation stands at a little over $955bln, and next in line is Home Depot at just under $240bln.  Here, stocks have climbed back to record levels, exceeding levels seen in both September of last year at $215.70, touching on $220.00 in July before extending gains to a little over $235.50 earlier this week.  McDonalds and Starbucks are also in the top five stocks here, with market 'caps' of $137bln and $120bln respectively, and both stocks have also accelerated there upside trajectory to post new record highs, reaching $220.00 and $100.00 a share respectively, before giving up some modest ground in the interim.  In between these two, we have Nike ($137bln), which is currently pressing all time highs for the third time this year at $90.0.  

Lower down the list we also have Lowe's, TJX (which includes TKMaxx in the UK) and Target all trading close to their respective highs, and in the later case, we have seen gains over 20% in the last 2 weeks alone.  Clearly, there is a pattern of following the broader risk theme as well as looking at where the strength lies in the US economy at present.  As we have seen in the past however, excessive gains - and there is an element of safe haven in US assets at the moment - will reach saturation at some point.  If US consumption starts to tail off - and today's data may be the start of it, then it is worth considering these extended levels in consumer discretionary.  Next week also sees the FOMC convene to deliver its latest policy response to the economy.  Markets are pricing in a modest 25bp cut, so we also have to factor in some potential disappointment, as this may not be enough to assuage fears that the central bank is doing enough to meet the oncoming economic downturn, which in fairness, looks modest as yet.  If that is the case, perhaps bond markets have it wrong.  Let's see.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.