Consumer Spending Still Sides With Stock Market Bulls

The Consumer Is The Economy

You have probably heard "consumer spending makes up 70% of GDP". While government spending on healthcare is included in the 70% figure, there is no debate about the importance of the actions of consumers relative to earnings and the stock market (see chart below).

Consumers Open Wallets

Thankfully, markets pay attention to everything, not just the painful and slow debt negotiation in Europe. Thursday brought a welcome distraction in the form of the latest read on the U.S. consumer. From Bloomberg and Econoday:

The consumer came to life in May, boosted by a 0.5 percent rise in personal income and helping to support a 0.9 percent surge in personal outlays that reflects heavy spending on autos and retail goods. And gains are not inflationary, at least yet, based on the very closely watched core PCE price index which edged only 0.1 tenth higher in May and is at a very benign 1.2 percent year-on-year rate which is actually down a tenth from an upward revised April.

Investment Implications – The Weight Of The Evidence

Consumer discretionary stocks were waving yellow flags in the second half of 2007, before the S&P 500 peaked (see to the left of red arrow).

Are we getting similar "the economy is in trouble" warnings from consumer discretionary stocks in 2015? Not yet (see chart below).

Are consumer stocks a fool-proof way to monitor risk in the stock market? No, it is prudent to make decisions based on numerous inputs, which is what our market model does. The model continues to call for patience with growth-oriented assets. If the hard data starts to deteriorate, which it may, we are happy to make the necessary adjustments.