Consumer Spending in U.S. May Beat Stock Gains

Consumer spending on discretionary items may have more room to rise than shares of the companies that produce them, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

As the CHART OF THE DAY shows, payments on mortgage and consumer loans fell as a percentage of household income after the latest recession ended in June 2009, according to quarterly data compiled by the Federal Reserve. The debt-service ratio in last year’s fourth quarter -- 10.3 percent, as depicted in the chart’s top panel -- was the lowest since at least 1979.

The drop provides consumers with “spending support,” Levkovich wrote in an Aug. 30 report. Declining unemployment, greater confidence and rising asset values may spur households to buy items other than necessities, he wrote.

“Discretionary spending is only beginning to rebound,” the New York-based strategist wrote. “Consumer discretionary stocks, however, do not look that attractive.”

The chart’s bottom panel tracks the performance of the Standard & Poor’s 500 Consumer Discretionary Index relative to the S&P 500. The industry gauge covers retailers, homebuilders, automakers, hotel chains and media companies, among others. In the current economic expansion, it’s the best performer among the S&P 500’s 10 main industry-group indexes.

Many consumer-discretionary stocks have become too costly, Levkovich wrote. S&P’s index was valued at 20.3 times earnings as of yesterday, according to data compiled by Bloomberg. The ratio peaked Aug. 2 at 21.3 times, the highest since 2009.

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