As investors stepped away from their computers during the
holidays, they may have failed to notice an absolutely stunning
headline. In the days before Christmas, the Federal Reserve
announced that a typical U.S. household spent 10.6% of its
after-tax income on debt payments in the third quarter. This
measure, known as the debt service ratio (DSR), includes
mortgages,credit card bills and other legal debt obligations. You
have to go far back to find the last time the DSR was so low -- to
1983, in fact.
Falling Debt Service Ratio
Add in non-debt measures, such as rent and car payments, and the
figures get adjusted to 15.7%, which also stands at a nearly
30-year low. A pair of factors get the credit: reduced borrowing as
many families have held off spending during the past few years to
shore up finances. And low interest rates that have enabled many
homeowners to refinance mortgages at historically-low borrowing
The steady reduction in debt comes as no surprise. Americans had
become so profligate in the middle of the past decade that their
debt-service ratio soared to a stunning 19%. But even with stronger
finances, consumers remain reluctant to spend. Many still own homes
now worth much less than five years ago. And the value of homes,
along withinvestment portfolios, are the two key assets that
provide consumers with a sense of well-being.
Surely, many consumers have takennote of their rising
retirementfund balances as the S&P 500 notched another
double-digit gain in 2012. And now, home prices have begun to rise
in many markets as well. Indeed, a further recovery in the
housingmarket in 2013, with many mortgages moving from "underwater"
to "above water," is likely to be the key psychologicalcatalyst
that triggers more robust consumer confidence--and
For those households that have held off on non-essential
purchases, 2013 may be the year when they finally start taking more
extravagant vacations, upgrade their wardrobes or even shop for a
new home. With personal balance sheets in better shape, consumers
could afford to take up debt service levels to 17% and still remain
below the 20-year average. That 130 basis point expansion in debt
service levels equates to roughly 8% higher consumer borrowing. And
that 8% growth in borrowing could really give the U.S.economy a
It's hard to overstate the power of U.S. consumer spending,
which accounts for two-thirds of the U.S. economy. For that matter,
a number of our trading partners also count on the United States
(which still accounts for 25% of globalgross domestic product (
) ) for robust export opportunities. In a virtuous cycle, rising
demand from U.S. consumers could trigger a freshwave of
capitalinvestments among our trading partners, many of which
utilize U.S.-made machinery to make all those consumer
For investors, the coming years should prove to be quite fertile
as many consumer-facing businesses build a head of steam. But
selectivitywill be crucial. For example, many retail stocks have
already anticipated such a rebound.
For example, the
, which owns a wide range of consumer-facing businesses, is already
more than 50% higher than it was in 2006 when it was first
launched. That means digging deeper into retailers to find
industrylaggards that have been brutalized by the GreatRecession ,
but would surely benefit from further gains in retail spending.
Retail comeback stories I'm watching include:
JC Penney (
Casual Male (Nasdaq: DXLG)
CitiTrends (Nasdaq: CTRN)
If history is any guide, then homebuilder stocks may have more
robust upside than retailers, simply because sector share prices
remain far below their peaks of the past decade. However, few
expect (or want) a return to the housing boom of the past decade,
with all of the excesses it wrought, so it may be awhile before
share prices return to prior peaks. As is the case with retail,
many homebuilding stocks have sharply rebounded in recent years, so
selectivity is crucial.
Roughly a month ago,
I noted four housing-related stocks
that appeared to cover robust growth and reasonable valuations.
14 million and counting
The U.S. auto industry is surely roaring back to life as consumers
start spending again. The industry likely sold more than 14 million
units in North America in 2012, and analysts think that figure
could top 15 million in 2013 (which would still be below the 17
million annual sales rates seen in the past decade).
Yet automakers are closely watching the U.S. housing recovery as
rising new construction activity tends to trigger a wave of pickup
truck purchases. These option-laden trucks carryprofit margins far
above the margins generated by smaller cars like the Ford Focus of
Chevy Malibu. In effect, the auto industry may sell a few more
vehicles in 2013, but the improving sales mix could give a huge
lift to margins.
Add in the fact that the European operations of
and their many parts suppliers are starting to shrink in line with
tepid demand (Ford, for example, is closing three European plants
during the next 18 months), and theprofit drag from that region
should soon abate.Shares of Ford and GM have started to move up off
of their lows, but remain sharply undervalued in the context of
Risks to Consider:
As Washington addresses the budget mess,taxes could rise and
government spending could fall, creating a drag on the economy.
That may provide a modest headwind for consumer spending in
Action to Take -->
This is a great time to start researching all kinds of
consumer-facing businesses. Many of them have been operating in a
lean fashion for the past few years, awaiting signs of life in
terms of consumer spending. That day may be at hand, and consumer
discretionary stocks may prove to be the most fertile investment
sector of 2013. On a broader level, many countries and industries
across the globe are likely to benefit from a resurgent U.S.
consumer. Indeed, this force may be strong enough to finally break
the global economy out of its current malaise.
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