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Cracks in Consumer Discretionary Spending?

Based on June 2017’s Market Report I wondered if there were real cracks forming in US consumer discretionary spending. Discretionary spending is an important category, it is basically people’s extra spending money. If you have extra money maybe you will go to the movies or out to eat more. Maybe you’ll buy some new running sneakers or you wont count the dollars you spend at Starbucks. Maybe you’ll even order HBO just for the new season of Game of Thrones. When money is tight these are the type of expenses that get cut first.

Since the US consumer drives approximately 70% of US GDP any slowdown can have real and severe effects on the US economy. I noticed in June XLY (Consumer Discretionary ETF) was down -2.2%, the first month this year it had a negative return. Before this month it was one of the best performing stock market sectors. Below are the top ten holdings in XLY and their performance for June:

  • Amazon: -2.81%
  • Comcast: -6.58%
  • Home Depot: -1.13%
  • Walt Disney: -1.81%
  • McDonald’s: 0.51%
  • Starbucks: -8.53%
  • Priceline: -1.07%
  • Time Warner: 0.71%
  • Charter Communications: -2.75%
  • Nike: 12.81%

There is a lot or red there, only 3 of the 10 stocks are positive. Excluding Nike the other two positive stocks are up less than 1% (Nike’s gigantic gain is sourced from an agreement to sell their shoes on Amazon). These 10 stocks account for more than 55% of XLY’s value and since most of them are in the red they’ve had disproportionate effect on the month’s return. Amazon, Starbucks and Comcast’s dismal monthly performance have really taken their toll.

xly chart july 2017

This is the first time in over seven months XLY has fallen under its 50 simple moving average. Unfortunately share prices can’t always go up and to the right, things always need to take a pause and trade down or sideways before hopefully recovering. Also, you can’t have a short memory, less than a month ago this sector was at a 52 week high. It’s also no coincidence that Comcast, Amazon and Starbucks (the current worst performers) were also at 52 week highs all at the same time earlier this month too.

I can’t come up with a catalyst for what I think will dampen consumer spending. Although there are issues with wage growth, the unemployment rate is steady below 5%. Also consumer confidence remains high, actually beating expectations. I think the biggest wild card is politics, the question remains if Trump’s antics, which more often than not overshadow his policies, ultimately will help or hurt the economy.  To me this drop in XLY looks most like volatility returning to a market that was at all time highs. I don’t currently see June as a signal for something bigger like the start to a new bear market, however I will keep an eye on this sector.PaperChase365

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