The high unemployment and low consumer confidence that have plagued the U.S. over the past several years may lead you to believe that Consumer Discretionary stocks have been on the outs. However, Bill Smead of Smead Capital Management speaks to why this has not been the case:
“People aren’t buying houses, they aren’t remodeling houses, they’re not buying cars as often, and all those things keep monthly payments off your income statement,” Smead told CNBC on Wednesday. “And the new good behaviors that are coming from the austerity are causing those income statements to get replenished very quickly.”
This has resulted in the deleveraging of U.S. household debt, Smead said. The U.S household debt service ratio has fallen to 11 percent in 2011 from a peak of around 14 percent in 2007, according to data from the U.S. Federal Reserve.
“The United States consumer has done an amazing job… they’ve [brought] historically high debt-service ratios down to within a few quarters; we’re going to have debt-service ratios in the United States comparable to 1982 and 1992 which were the beginning of five to seven year prosperity periods,” Smead said.
“Think of it like this. Who is likely to spend money and do it more consistently, someone who’s in very good shape on their income statement that lacks confidence or someone who is up to their eye-balls in payments but brims with confidence? The unconfident households with room in their income statement will ultimately be part of what we call “pent up demand” for goods and services.”
Interestingly, the Consumer Cyclical sector (IYC) is up 114.21% since the bear market lows (March 9, 2009 - November 15, 2011), outperforming the S&P 500 which is up 85.92% over this same period of time. This is a theme that has been picked up by the PowerShares DWA Technical Leaders ETF (PDP):
See www.powershares.com for more information about PDP.
HT: CNBC
