Ramblings of a Portfolio Manager

The Consumer is Dead. Long Live the Consumer

The consumer is de-leveraging and will never return to his or her prior level of spending. We are going to have an economic new normal because the consumer has been permanently impaired. The US savings rate will approach that of Japan, crimping consumer spending and any economic recovery. These have been some of the catch phrases of economic doomsayers for the last 18 months. The Media, always looking for a good sound bite, has picked up and repeated these mantras, ad nauseum, to the point that many believe them to be truisms. With nearly 70% of our economy dependant upon the US consumer, such dour sentiment naturally has caused investor concern about the strength of any economic recovery.

This morning Capital One Financial announced that credit card delinquencies fell in February, the first time in over 18 months. Last Friday retail sales unexpectedly rose slightly, versus an expected decline, despite heavy snowstorms that hit the Northeast. A week ago the Federal Reserve released its monthly consumer credit data, which showed that, for the first time in almost two years total consumer credit outstanding rose year over year. It was expected to decline. Consumer discretionary stocks, relegated more or less permanently to the hurt locker for the last two years, have been significant outperformers for the month. What should we make of all this?

Last fall, Jim Paulsen of Wells Capital Management told CNBC “never count out the US consumer.” It wasn’t an original statement but a bold one nonetheless in the face of what has become the newsroom culture of negative sentiment regarding the consumer. We agree with him. Americans love their material possessions. One of our favorite movie lines is from The Jerk: “it’s not the money, it’s the stuff.” To us, that says it all. It would take something just short of Armageddon to permanently cripple the US consumer, in our opinion. Recall that after 911 we also heard a host of market watchers decrying the death of the consumer. Back then we were all going to stay inside and “couchette,” that quaint 90s term for huddling at home and emulating the nuclear family home life glorified in the 50’s. Didn’t happen. In fact, that disaster had just the opposite effect with many consumers, feeling that life was too short, running out and buying that boat, sports car or vacation home they had always dreamed of while others sought out shopping as a comfort food to ease the anxiety of a troubled time. Behavior like that is culturally ingrained and it doesn’t shift overnight—or over a couple of months for that matter.

We now have a few data points supporting the notion that the consumer is not dead or at least is rising from the grave. They are nascent signs but important ones nonetheless and if history is any guide, they will strengthen in the months to come, especially if the unemployment rate begins to drop. And a declining unemployment rate should have a double impact as not only will more people be earning money to spend on consumption, but those with jobs already should be further encouraged to spend by the positive sentiment created by the data. Meanwhile, the market has been on a stealth rally since February 9th, with the S&P 500 climbing 8.8% and the Russell 2000 tacking on an incredible 15.4%, yet the Media tells us daily that we are stuck in a range. That signals to us that no one believes in the economic data or the rally that is has engendered. We like that kind of skepticism. As the consumer data continue to improve investors will come to realize that, perhaps, the Emperor does have clothes and that he just bought them in a high-end retailer…and that’s the sentiment we need to continue the Market rally.