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The Challenge of Assessing Consumer Health


Assessing the health of the consumer has proved challenging this year. On one hand, there is a lot working in favor of the consumer, but on the other hand, a lot isn’t. The labor market provides a good example of this. Demand continues to outstrip supply and wages are growing which are both good signs. But jobless claims and layoffs are creeping up and inflation is higher than usual despite being lower than last year.

Wage gains are being negated by higher costs and a less robust job market has workers concerned about the possibility of a recession. “The danger of a wage-price spiral is that it doesn’t stop until you get a slowdown,” warns Chris Senyek, the Chief Investment Strategist at Wolfe Research.

This has caused Wall Street to look for safe places to invest. Consumer staples are an obvious choice due to the nature of the market and the stability it provides. Additionally, this sector is reasonably valued with consumer staples currently trading at 1.15 times forward earnings of the entire S&P 500, which is consistent with historical trends.

Surprisingly, high-end goods also present an opportunity for investment as their customer base has more savings and is less likely to feel the effects of a recession. Moreover, the S&P 500 has seen a positive growth of 12.7% this year, further indicating that the high-end market may not be as affected as other areas.

Opportunities and Pitfalls in the Market

Investors wonder how the market will hold up as economic pressures continue to mount. The ups and downs of the market are influenced by perceptions of it, but certain sectors that seem to fare better than others. This year, companies like Hermès, LVMH Moët Hennessy Louis Vuitton, and Nordstrom have all seen considerable gains while Bread Financial, Dollar General, and Advance Auto Parts haven’t.

According to experts, there may be a surprising opportunity for investors in the home builder stocks market. Even though interest rates are rising, the inventory of houses remains low, creating a need for housing. Companies that cater to various price ranges of homeowners, such as Toll Brothers and Lennar, are expected to do well.

However, consumers may not be as willing to spend on hotels, resorts, and cruise lines during a downturn. Although revenge spending has brought about a 30% gain in this area so far this year, with consumer confidence down from pandemic highs, revenge spending on travel is nearing its end.

But even as some sectors of the market normalize due to economic pressures, new opportunities abound for smart investors.

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