For years, fears of the consumer's demise have been prevalent. Each time the fears have surfaced, the consumer ignored the problems and just kept on spending. The savings rate has remained low, wages have remained firm and the economy has continued to grow. Assets have been appreciating too.
Look at what the price of residential properties have done in the last six years. The stock market just made a new high a month ago, adding to 401k savings and other stock market investments. It has been a perfect world for some time, and any thought the consumer wouldn't continue to spend has been wrong.
After this perfect storm of consumer spending, we are hitting the first real road bumps in the consumer's ability and desire to continue to spend. Gasoline has recently moved to $3 a gallon, and food prices have been rising as well, which is increasing pressure on the consumer. We know the government likes to look at inflation ex-energy and food, but last time we checked, these two necessities are what everyone spends on first.
The subprime issues have created worries about borrowing and fear about its impact. People can no longer bet on appreciating real estate values, as the housing slump has forced prices lower. Many have already tapped into the equity created in the last few years and have spent it.
This is a twofold issue. First, there is the absolute issue of the consumer having used up this source of funds, and second, there is the perception issue. When consumers don't feel good about the prospects of their assets appreciating, they stop spending. The bottom line is the consumer may be losing his desire to consume.
So what do we do about it? Well, the one thing we can do is avoid owning consumer-discretionary stocks or reduce exposure to the sector until these issues become resolved. We have to look no further than the biggest and best indicator of consumer spending,
Wal-Mart has been struggling during the bull market, and this price action has created a consolidation or trading range since late 2006. With the company's disappointing earnings report and comments about the challenged consumer, the stock gapped down, breaking below the lower end of the trading range. This is a significantly negative occurrence, suggestive of a still lower price and implying Wal-Mart will be an underperforming issue for some time.
It's not just an isolated problem either.
is another stock under pressure, with a weak and vulnerable technical configuration. HD has been holding a lateral consolidation since the beginning of the rally in 2003. The breakdown in the housing market is likely to keep this stock stuck in neutral for quite some time.
HD and WMT are two examples, but if we look at the rest of the broad-line retailers, we see similar stagnation. This is sending a signal about the spending power of the consumer, and it doesn't look good.
At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.