2022 has proven to be a difficult year for the US consumer so far.
University of Michigan’s sentiment index data released last week indicated a decade low for the mood of US shoppers. Rising inflation, higher interest rates and geopolitical uncertainty have weighed heavily on confidence despite higher savings levels following the pandemic and a strong job market.
The near-term impact of rising fuel and food costs has sparked concern among investors as well. The S&P consumer discretionary index is down nearly 10% for the year versus 6% for the broad market.
Gravity Exists asked two investors with unique insights into US consumer equities:
How do you see the coming quarters setting up for the US consumer and how are you positioning as a result?
Sean Gambino, Chief Investment Officer at Heron Bay Capital, said:
We have not been constructive on the consumer since the 4th quarter of 2020. We were early to flag inflation as our key concern for the next several years and had firmly put the term “transitory” to bed before 2022 began.
Considering the macro and geopolitical developments in recent months, we feel that the broader US consumer is structurally challenged in ways that have not been seen in more than a generation. Of equal concern, frankly, is the fact that most market participants active today have never navigated such a treacherous environment before, creating a heightened potential for irrational swings.
With the end of stimulus money and forbearance programs, US consumers now must approach discretionary spending in a much different manner than they have become accustomed to over the past two years.
In addition to the end of easy monetary policy, the consumer is faced with exploding commodity costs affecting almost everything that touches their lives, with no clear playbook on how to best manage. Many investors now expect that the lower end of the income spectrum will be hurt the most. This will happen unfortunately, without doubt. Lower earners have fewer options and are forced to shop at certain stores and prioritize certain products leaving them hostage to pricing power of mass-market retailers.
Where we believe many are guessing wrong about future consumer behavior is in the higher wage-earning segments. During the pandemic we’ve become accustomed to data supporting the resilience of the mass affluent and wealthy consumer segment, particularly luxury goods. Many investors now appear confident that wealthy Americans will continue to support overall consumer spending. We disagree.
The high-end consumer has what all the other segments lack – options. They can spend up, spend down or simply cut spending altogether. With so much uncertainty in the world economy now, it is the path of decreased spending among the wealthy seems increasingly likely. And we believe that is what investors are still missing.
Vince Sullivan, Chief Investment Officer of Telsey Consumer Fund, said:
During the first half of this year, the consumer sector has faced the combined headwinds of very challenging comparisons including lapping stimulus, rising gas prices, and of course, continued supply chain pressures. This is well known, and stock prices have adjusted as a result.
We believe that business model enhancements made by well managed companies coming out of the pandemic will now allow them to navigate through these new pressures successfully. And, as always with the consumer sector, there continue to be categories of opportunity, whether essential or discretionary, given the nearly 70% of GDP that is derived from consumer spending.
Therefore, looking ahead, we see a less challenging second half of 2022 for consumer companies.
We see improving fundamentals and increased opportunities in both margins and earnings per share heading into the back half of the year. In our view, the consumer sector is headed for a spending bifurcation between the high end, which will continue to perform with elevated demand and price points, while the low-to-middle income consumer will have to manage current cost pressures.
We are currently positioned with elevated levels of cash and are investing in differentiated brands and concepts geared toward the high end.