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Key Points
- January Retail Sales Explodes Past Estimates to $568 Billion Making the Trailing 1-year $6.2 Trillion
- The U.S. consumer in aggregate has significant consumption capacity to fuel further spending.
- The best opportunities we see continue to be tied to the services component of GDP.
January 2021 Retail Sales: Wildly Better Than Expectations
The market and economists have been underestimating the American Consumer for decades. Consumption is in our DNA and in short-term periods where consumption falls, a mean reversion opportunity typically exists. The monthly Retail Sales data has always been lumpy and unpredictable which makes it a wonderful datapoint to use for mean reversion opportunities. Case in point: the January 2021 Retail Sales report. Widely expected to be a sluggish report, the actual numbers came in much stronger at +5.3% versus the expectation of +1.2%. Yes, Federal Stimulus checks get all the credit for this unexpected ramp in spending but to be fair, our spending can sometimes be episodic versus linear but it’s always reliable in the end. Nothing is more predictable than a consumer’s propensity to spend. Could the historic drop in retail sales, even greater in magnitude than the 2008/2009 financial crisis, have been a better buying opportunity for investors when we know with absolute certainty that consumers do not go on strike for very long? The answer has been a resounding yes.
The longer we go not spending on the categories we are dedicated to, the bigger the pent-up spending that occurs. It’s a bankable concept and one we are trained to look for as global consumption investors. With potential additional stimulus on the way, we should expect further strength in the spending categories and the Retail Sales numbers in general. From an investment perspective, the trick is to know which spending categories have the best opportunity for an aggressive re-rating higher and which could disappoint as our spending gets back to a more normal level. Looking at the January report tells me the resurgence of spending in the lagging areas of apparel and clothing, travel, transportation, professional services and food and beverage still offers significant upside opportunities.
Further Spending Capacity Will be Unleashed Later this Year.
Consumer balance sheets in aggregate are among the healthiest they have ever been. That allows for further spending capacity at some point as consumers have the ability to spend in areas they have curtailed. It’s still quite sad we have such high unemployment but as the vaccine distribution rolls out faster and more broadly, more industries and businesses will re-open, particularly in the services sector. As demand returns, so too will the hiring of millions of furloughed service employees. That’s the next phase of the consumer spending acceleration I see coming.
At the peak of the COVID-19 crisis, consumer savings rates went parabolic as they collected paychecks or unemployment while not being able to spend as they always have. Savings rates peaked at over 30% and have since fallen but are still elevated when compared to history. Some of that may be because of the uncertainty that still lingers but some of this excess savings is simply waiting for a return to normal life where pent-up spending can begin. Overall, the consumer balance sheet is generally quite healthy with credit card account delinquencies and auto loan delinquencies very low by historical standards. I watch these datapoints carefully to see if early warning signs are developing. For now, the consumer, in general, is as healthy as she has been for many decades, ex-the unemployed cohort which should start getting back to work later this year. The below chart from Ycharts highlights this attractive consumer thesis.
The Brands that Dominate Consumer Services Offer the Most Opportunity Currently
As you know, the U.S. consumerism engine has not been firing on all cylinders since the beginning of COVID-19. With the vaccines rolling out at a time when hospitalizations and cases are falling, there is sure to be some wicked pent-up demand unleashed in the areas of consumer spending that have lagged over the last 12 months. Sometime this year, the consumption flywheel will again start employing people across the services sector. This sector just happens to be one of the largest employers in the country. Open the bars, restaurants, casinos, hotels, cruise lines, concerts etc. and people will come out of the wood-work for these jobs.
I love tracking the smartest and most successful hedge fund managers for nuggets of wisdom. Below is a quote from the 12/31/2020 letter from one of the most respected, top performing hedge fund managers, Dan Loeb from Third Point Management. Needless to say, we couldn’t agree more with their assessment of the opportunities in 2021 and beyond where the consumption theme is concerned:
On the economic front, the surprising resilience of the US consumer has informed our optimism since Q3 2020 about a rapid economic recovery following widespread vaccine rollouts. Employment is still down 7% from pre-pandemic levels but jobs in sectors disproportionately impacted by COVID-19 such as retail, restaurants, and entertainment should return quickly as vaccinations ramp and consumers eagerly return to normal life.
A substantial portion of the accumulated $2 trillion of excess savings among consumers should be unleashed as the economy reopens, favoring services sectors such as restaurants, travel, and leisure.
Both monetary and fiscal policy are also supportive tailwinds.
As you can see from the below chart, the white line seems most disconnected from “normal” where consumption is concerned. That’s the services portion of personal consumption expenditures and the area we see tremendous opportunity for mean reversion. The irony again: most investors hold some of these great brands but given how large the services component is to overall GDP, the exposure is typically insufficient to capture to opportunity, particularly when the services sector has lagged so severely since last February. When you know something tracks in a range for over 50 years and it falls well below the normal range, there’s a wildly attractive opportunity for mean reversion. That’s what we see today in the services sector.
The most relevant brands serving the lagging consumer services industries appear to have significant runway for business and stock improvement under the above scenario. Here’s a list of many of our favorites currently:
Amazon: COVID-19 brought millions more people into the fly wheel that will likely stay forever.
Fed-Ex & UPS: Will both benefit from business and consumer commerce getting back to normal.
Disney: Disney+ and the parks and theatres have a lot of room to improve.
Restaurants: Chipotle, McDonalds, Shake Shack, Starbucks, and Darden should thrive.
Hotels and Casinos: Marriot, Hilton, AirBnB, Wynn, MGM, and Caesars should see epic demand.
Airlines: Southwest, Delta, and Jetblue with strong balance sheets and high brand love should thrive.
Travel platforms: Booking and Expedia should see demand that’s unprecedented. Book your 2021 vacations soon while the demand hasn’t overwhelmed the supply of lodging. Prices are sure to rise through summer at the very least.
Ride sharing & merchandise delivery brands: Uber & Lyft are ripe for improving fundamentals.
Retail: Stores like Target, Walmart, Best Buy, Home Depot, Lowes, Ulta, and Nordstrom should see high traffic.
Bottom Line:
- We should expect the Retail Sales data to be lumpy but the trend is positive & sustainable.
- U.S. consumers continue to have significant consumption capacity via large savings and credit availability.
- The services sectors have been slow to recover but likely offer the best mean reversion opportunities in 2021 & 2022.
Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.
