Our Prosperity is Tied to the U.S. Economy

Hypothetically speaking, if you had to invest in a particular area of the U.S. economy, which do you think would offer the best investment opportunity?

In my opinion, if you look at the chart below, I think the answer is the green line; that is unless you prefer lots of volatility in your portfolio.

The green line represents personal consumption expenditures or household spending. It seems like a stable, consistent, and growing metric. At roughly 72% of GDP, it’s clearly a very important component of U.S. economic prosperity.

Source: Bloomberg U.S. GDP components.
Green: Personal consumption expenditures – aka consumer spending
Blue: Domestic investment
Purple: Government spending & investment

Let’s get more granular into the consumer spending investment theme. U.S. retail sales are roughly 30% of total GDP; that’s roughly $5.5 trillion per year. In good economic times and bad, consumers are spending money on something. In boom times, we spend more on lavish items and discretionary items. In tough times, we pull back on the discretionary side and focus more on the “needs” side our lives. Again, this sector can be very predictable and stable.

Let’s take a closer look at retail sales. Again, the word consistent comes to mind. Below is a chart of U.S. Retail Sales since 1/31/1993. For most of the time, retail sales tend to trade in a sideways range offering significant consistency. I’ll assume people agree that this sector is an important area that drives the economy and likely offers some decent investment opportunities. What’s working in consumer-land currently? To answer that question, we need to identify the companies or brands that are resonating with consumers because they are highly relevant in our lives.

Let’s look into some key spending categories for the answer:

• Apparel – the health and wellness category are thriving. Fashion trends have collided with athletic trends and the result is the “Athleisure” boom. Who’s most relevant here?
  • Nike, LuluLemon, Adidas are three iconic brands winning with consumers. All of them continue to have strong overall sales growth including online sales. These great brands also continue to innovate and build wonderful in-store experiences with compelling marketing and advertising. Consumers engage with these brands and their sales growth shows it.

• Eating out – fast casual is thriving. Who’s highly relevant today?
  • Chipotle, Shake Shack, McDonalds, Domino’s, Starbucks all come to mind. Incomes are growing, unemployment is low. Those are all decent indicators of people’s willingness to spend. We like to have food brought in, while we binge on Netflix. We also like to get out of the house and socialize with friends and family. Restaurants that make both easy and offer an exceptional experience win.

• General Merchandise shopping – Luxury and discount seems to be where the action is. Who’s resonating?
  • Costco, Home Depot, TJ Maxx, Five Below, Dollar Tree, Target, Louis Vuitton all seem to be resonating very well with consumers. I know everyone continues to think brick-n-mortar retail is dead, but all the above stores seem crowded when I shop there. And they all continue to build online capabilities to allow people to shop for what they want, when they want, and how they want. That means there’s plenty of room for growth.
  • Auto’s: Luxury in particular. Who’s resonating with consumers?
    • Ferrari – imagine a company with 4x the industry operating margins, 10x the average price per car and a line around the block to order the cars! The luxury car market is thriving and it’s kind of recession proof. To get a Ferrari you go on a wait-list and the scarcity value of the car and brand is so strong, people will do almost anything to move up on the list.
    • Tesla – I want a Tesla Model S so badly, perhaps next year. There is no denying the trend toward more electric vehicles is unstoppable and Tesla has a very large lead versus peers from a software and autonomous perspective.

What does retail sales not track but is highly important from our daily consumption perspective? I call this “lifetime spending”. The government data is very narrow in its scope so “real consumption” is much larger than retail sales might indicate. Here’s some areas where consumption is happening in a big way.

• Entertainment & media: streaming video, streaming music, live events. Who’s relevant today?
  • Netflix – invented binging shows and movies.
  • Spotify – made it easier than ever to build your favorite songs into playlists, offer you significant podcast content and utilizes artificial intelligence and machine learning to help “push” you to more content that will likely be relevant to you.
  • Disney – It’s summer and movies and theme-parks are highly popular. Disney continues to release amazing favorites to adults and kids.
  • Live Nation – I love a good concert. Artists no longer make the bulk of their money in making a “record,” they thrive when they go on tour. If you make more money doing something you likely do more of it. That’s a powerful trend with sustainable momentum. Live Nation is the largest live entertainment provider in the world, so they have scale and a moat around the business that’s not easily overcome.
• Services – As you know, the U.S. is more of a service economy than a manufacturing one. That means there’s significant opportunity for service companies to add value to the 320 million consumers by making their lives easier and allowing them to be more productive. What products and services are being used and resonating with consumers now?
  • Payments – Visa, Mastercard, Paypal, Square are all thriving in this economy and making it easier for consumers to transact without friction.
  • E-commerce sites – Amazon, Etsy, Shopify. Amazon owns 50% of all online retail sales but online is still only rightly 15% of the total so there’s plenty of room for growth. Etsy is resonating with hand-crafted items made by artists and Shopify empowers small businesses and offers them instant tools and access to build an online store. Opportunity abounds in this category regardless of the business cycle.

Since we all invest in the U.S. economy, perhaps it’s wise to invest in the primary driver of the economy?