Citigroup’s chief US equity analyst,Tobias Levkovich, is not a natural bear. Up until October 8th, he was the most bullish of 9 senior market strategists tracked by Bloomberg - he’s now the least optimistic.
Highlights from his latest missive on US consumer spending:
…higher-end consumers have a disproportionate impact on consumption activity. In particular, roughly 20% of Americans own an estimated 90% of stocks and thus the recent plunge in stock prices has wiped out as much as $8 trillion of US equity market value since mid-2007. In addition, job losses, which are expected to continue, are having a detrimental impact on consumer purchases.
As a reminder, that top 20% of American income earners account for roughly 40% of US consumer spending and more than the bottom 60% of income earners combined, making them an integral and influential part of the consumption society that accounts for roughly 71% of GDP.
The central argument of the note (with certain caveats) is that the negative wealth effect of declining stockmarkets has been underestimated.
While spending in certain areas remains resilient - and as much as 65 per cent of consumer spending is non-discretionary and therefore “unlikely to plunge” - very discretionary items are coming under increasing pressure, Levkovich argues:
Recent surveys show that Americans’ intentions to take vacations have plunged to 1970s-like levels and there is some relationship to the hotels, gaming and cruise line industries’ stock price performance. Such trends provide a major challenge to companies like Carnival Cruise Lines and Disney. In addition, we have seen recent reports that lobster prices have fallen given weak end market ales trends. Thus, it seems that expensive plans or purchases are being put off, leaving Americans to “live less large.”
In our opinion, this may weigh on specialty retailers such as Tiffany’s and Coach, while having less impact on lower end chains such as Claire’s Stores. Higher end departments stores such as Nordstrom and Saks are also being affected, in our view. In addition, the dollar could affect some of the past benefit of Europeans coming to the US to shop. Should equity markets begin to recover, these higher end chains could rebound but possibly with a bit of a lag.
Consequently, investors should seek out companies that provide consumers with “value propositions, both real and perceived”:
Wal-Mart is one of the few stocks that is up year to date in the S&P 500, while there is also reason to believe that restaurant companies such as McDonalds may be picking up share from other more expensive options as consumers trade down. A similar argument could be made for discounters such as Home Depot and even the dollar stores. But, we suspect that price is not the only motivator for purchases.
Companies like Apple and Google provide buyers/users with other forms of value as do cable companies, including Comcast, which may provide relatively inexpensive leisure options such as movies or sports. In addition, safety and security offered by insurance companies may also provide policyholders with a sense of value, as they continue to pay premiums. In this context, one has to take a somewhat broader definition of value propositions.
And because we love a good chart here on FT Alphaville, here’s Citi’s Living Large index:
