Recent data shows that Americans are willing to spend for now, especially as inflation continues to fall. However, some companies say that customers are declining. Given that consumer spending accounts for nearly two-thirds of the U.S. economy, the implications could be significant. On Friday, Jason Ware, chief investment officer at Albion Financial Group, and Brian Stutland, portfolio manager at Equity Armor Investments, presented their bullish and bearish positions, respectively, on CNBC’s “Street Signs Asia.” “The consumer is looking pretty good,” Ware said, describing the “really strong” labor market as a “fountain from which consumer power is born,” adding that he is optimistic about the consumer for the near term. July jobs data showed that while nonfarm payrolls rose by 187,000 in the month — slightly below the Dow Jones estimate of 200,000 — it actually represented a modest gain from June. The unemployment rate was 3.5% – just above the lowest level since late 1969. “The general view is that consumerism in the U.S. is resilient. We see that in corporate earnings reports. So that’s where we’re at right now. And we think that’s going to continue in the near term until we see the labor market start to crack and by then the consumer is pretty looks good,” Ware said. But he is less bullish on the medium term, saying he believes a recession will still happen. ‘Challenge for consumer’ Stutland, for his part, agreed that a strong labor market is key to consumer resilience, but pointed out that rising interest rates are increasingly bad for consumer stocks. Historically, the Consumer Discretionary Sector SPDR Fund has had a high negative correlation with US 10-year interest rates. “A rise in 10-year rates has historically been devastating for consumer and consumer discretionary stocks,” he said. “With the 10-year breaking above 4.25%, we see all consumer stocks that have had great years pulling back sharply.” Stutland said consumers will have to pay higher interest payments, and if the 10-year rate continues to rise, that’s “a problem for the consumer.” “Investable consumer discretionary stocks should be large-cap, US-based, and an interest rate environment where rates are flat or slightly lower. This creates a tight needle to beat in this sector,” he said. While Ware acknowledged that rising rates could pose a problem for those consumer stocks, he said he’s not sure the 4.25% 10-year rate will “do much to directly affect economic activity.” Rising credit card debt Americans turned to more and more credit cards to make ends meet heading into the summer, sending cumulative balances past $1 trillion for the first time, according to a New York Federal Reserve report in early August. Between April and June, credit card debt grew by $45 billion, up more than 4%, according to the report. While the data refers to “the US consumer showing signs of exhaustion,” Ware said, “the reality is that we’re seeing debt increase in line with growth in the US economy.” The pandemic is draining cash from stimulus funds — and that means a shift to credit, he said. “Right now it’s really wage growth and jobs that are driving people to spend there, so until that changes, it’s hard for me to see the consumer really closing in on the deal,” Ware said. For Stutland, that consumer strength keeps it bullish on the stock market and the U.S. economy in general — but not in consumer discretionary stocks. “I stay away from lower market cap-weighted stocks and consumer discretionary brands from these apparel brands,” he said. Stutland said it would have names like Amazon, Home Depot and Lowe’s buy its stock. “Overall, the stocks available to consumers to invest in are shrinking. They have to be big and massive and able to adapt quickly to rising wage demands, and the bigger the company, the easier it is to manage the squeeze on profit margins.” he said. Ware said his firm also owns Amazon and Home Depot, as well as Starbucks. Visa is also a “big consumer play” with “good traffic trends and volume,” he added. “You want to stick with the secular consumer growth stories that are going to be perennial winners,” he said.
Is the US consumer resilient? 2 investors present a bull and a bear case