Investors Are Winning Big by Betting on American Consumers

Consumer spending has actually been pretty weak, posing a puzzle for economists

Do U.S. Retail Sales Measure Consumer Strength?

The $150 billion windfall from a plunge in gasoline costs has failed to unleash a surge in U.S. household purchases, prompting economists to slash forecasts for economic growth. Investors, sensing the bang is coming, placed an early bet on the consumer and it's paying off.

The Standard & Poor's 500 Consumer Discretionary Sector Index has risen about 6 percent since the start of this year, handily beating the broader S&P 500's 1 percent gain, even as consumption missed analyst projections.

"The American consumer is impossible to push down for a long time, and investors are putting up money now for future returns,'' said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York.

Economists, though, look at the picture as a glass half empty rather than half full. That's because the American consumer, whose spending accounts for almost 70 percent of the economy, has been mostly missing from the scene: Spending and retail sales stalled in April, after purchases cooled in a major way last quarter .

Clearly, households aren't rushing to splurge all the extra cash from cheaper fuel. Instead, they're paying down debt and pretty much setting away the rest of the money for a rainy day. That's pushed up the saving rate. 

This turn of events has sparked a debate about what's going on. 

Some economists argue about the lag between a boost to purchasing power and an actual spurt in spending.   Others say households are still cautious given their relatively low level of precautionary and retirement savings. Also, wealth from rising home and stock prices isn't motivating spending the way it did before the recession.

 When economists don't know the answer, they wait for fresh data to tell them something. Retail sales figures for May will be released Thursday.

"Obviously, consumer spending has been disappointing," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. "I don’t necessarily see the case for getting more bulled up on the consumer. On the other hand, it would probably be a bit hasty to make dramatic changes to the outlook on the consumer."

Investors say the strong job market makes consumer-related stocks a good bet. That's even more true at a time when soft global growth, a stronger dollar, and the energy-related pullback in capital investment are weighing on manufacturing and exports.

Besides, roaring car sales and solid results for travel, eating out and online shopping are early signs that consumers haven't disengaged, even as total spending hasn't lived up to expectations.

"Consumers are choosing where to spend," said Poonam Goyal, a senior analyst for U.S. retailing at Bloomberg Intelligence. "You’re seeing weakness but you’re also seeing pockets of strength. That shows the consumer isn’t dead."

It's anyone's guess when Americans may emerge from their shells, or what'll make them accelerate purchases in a broader bunch of categories. Meanwhile, investors say the recent weakness in spending offers another benefit: helping keep a Federal Reserve rate increase on hold, allowing stocks to party on longer.

—With assistance from Catarina Saraiva 

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