In fact, last week, US retail sales came in below expectations for a second month in a row, and US consumption growth has held relatively steady at a 2% annualized rate for the past 10 quarters.
As I write in my new Market Update piece, there are four reasons why consumption is still so far below trend despite the improving labor market.
1.) Keeping the improvement in context: The job market is actually improving from a very low base.
2.) A Smaller Work Force: While job growth has been accelerating recently, the drop in the unemployment rate has been helped by millions of people dropping out of the work force. Today, the labor force participation rate stands at 63.7%, the lowest level since 1983.
3.) Decelerating Wages: Disposable income growth has been decelerating over the past year to 3.8% year-over-year growth today from 6% in early 2011. For hourly workers, the situation is even worse. Hourly wages were up just 1.5% in January from a year earlier, the slowest rate of growth going back to 1965.
4.) Household Debt: While household debt has contracted to 114% today from a peak of 130% of disposable income in 2007, it’s still well above the historic average.
This begs the question: When is consumption likely to accelerate? With real wage growth stagnant and household debt still high by historic standards, I don’t expect a significant pickup in personal spending this year. Because repairing the consumer balance sheet will likely take several more years, it’s unlikely that consumption will accelerate within the next few years.
Curiously, US retail stocks seem pleasantly undisturbed by any of the above. Retailers continue to advance and are up roughly 7% year to date. This latest surge has pushed valuations up to nearly 19x trailing earnings, a 40% premium to the broader US market and close to a 20-year relative valuation high.
As such, consumer discretionary stocks in general — and retailers in particular — still may prove to be disappointments this year, and I’m continuing to advocate an underweight to US retailers. I find it hard to justify why investors would pay a big premium to be leveraged to the US consumer.
Instead of retail, I prefer segments of the market less exposed to US consumption [possible iShares solutions: S&P Global Energy Sector Index Fund (NYSEArca:IXC), S&P Global Technology Sector Index Fund (NYSEArca:IXN), and S&P Global Telecommunications Sector Index Fund (NYSEArca:IXP)].
Disclosure: Author is long IXC and IXP
International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist as well as the Global Head of Investment Strategy for BlackRock Scientific Active Equities. Russ initially joined the firm (originally Barclays Global Investors) in 2005 as a Senior Portfolio Manager in the US Market Neutral Group. Prior to joining BGI, Russ managed several research groups focused on quantitative and top down strategy. Russ began his career at Instinet in New York, where he occupied several positions in research, including Director of Investment Strategy for both US and European research. In addition, Russ served as Chief North American Strategist for State Street Bank in Boston.
Russ holds a JD from Boston College Law School, an MBA from Columbia Business School, and is a holder of the CFA designation. He is also a frequent contributor to the Wall Street Journal, New York Times, Associated Press, as well as CNBC and Bloomberg Television. In 2008, Russ published “The ETF Strategist”(Portfolio Books) focusing on using exchange traded funds to manage risk and return within a portfolio.