This morning’s disappointing GDP read contained some mixed signals, and in some ways could be seen as a positive, at least for certain sectors. It was weakness in business investment and spending that resulted in the low growth number (1.2 percent versus expectations of 2.6 percent), but that was in part offset by fairly robust consumer spending. That is important as the only way that businesses will loosen the purse strings is if they perceive the prospect of increasing demand, and ultimately that has to come from the consumer.
When all is said and done, it has been the consumers’ reluctance to spend that has resulted in the relatively slow recovery from the recession of 2008/9. That is only logical given the nature of that problem. Credit crises cause households, as well as businesses, to become somewhat wary of credit, and an extended period of consolidation and deleveraging is only natural. This GDP read, however, would indicate that that period may be coming to an end. The question, of course, is what does that mean for investors?
Back in January of 2013 I wrote here that a focus on business to business tech would pay dividends for investors that year as, recession or not, the world of technology was moving forward in leaps and bounds. Companies faced a choice; they could keep up or die, so spending on updating systems looked inevitable. That sector did indeed do well that year and has continued to do so for a while. If these GDP data do indicate a shift back to a more consumer driven economy, however, the focus of investors has to change with it.
The logical place to look is the first places that more robust consumer activity will show: retail, entertainment, or travel. Regardless of the depth of the recession or the pace of the recovery, human nature dictates a certain pattern of post-slump behavior. First comes the (somewhat belated) fear: purse strings are tightened and any money left after essentials is used to pay down debt. Then comes the relief: households that survived without losing their home or declaring bankruptcy start to spend on larger, investment type purchases such as a new car, or some home improvements and appliances.
Then, after all of that hardship, when things really start to look up, they treat themselves. I would guess that the majority of you, regardless of where you sit in the grand economic scheme of things, will recognize that pattern.
If we are at the “treat” stage, then “affordable luxury” will be the key to investing over the next few months. Cruise lines such as Royal Caribbean (RCL) and Carnival (CCL) would fit the bill, for example. If forced to choose between the two, I would prefer the more upscale RCL.
In retail, the purveyors of the staples, such as Wal-Mart, that have had a good run recently, will see a stalling of growth, whereas more upscale stores, such as Whole Foods Market (WFM), whose Q2 earnings disappointed again on Wednesday, and even pure luxury such as Tiffany (TIF) should see better times and recover from recent woes.
There is a delicious irony to all of this. I have been uncharacteristically bearish for a few weeks now. The fundamentals of the U.S. and global economies just do not support record high levels in the stock market, so a correction has to come. I still believe that it will at some point soon, but today’s GDP report, which will probably be seen as bad news by most, actually has hidden in it the first glimmer of long term hope. Consumers are finally letting go and that could be enough to drive us forward for a long time to come.