Check this out

Before you go

Did you know you can subscribe to this type of content and get emailed when a new article is available?

Equity Outlook  |  Q2 2018

Housing remains a bright spot for the consumer sector

Walter D. Scully, CPA

Walter D. Scully, CPA
Portfolio Manager of Putnam Global Consumer Fund and Putnam Research Fund


Stocks in the consumer sector have been driven by many positive forces in recent years. One of the most significant has been the U.S. housing market — a pillar of strength and a segment of the economy that is still recovering from one of its greatest busts in history. Following the peak of the housing bubble in 2006 and the subsequent market collapse, U.S. home prices declined for six years. Since 2012, however, housing has made a remarkable recovery, with average home prices now higher than their 2006 levels. Despite this advance, we may not have reached the late innings of this recovery, and housing remains a notable bright spot for U.S. consumers and equity investors.

Inventory is tight, boosting housing wealth

Following the 2006 collapse, we saw new home construction plummet — from 2.2 million new homes being built annually to just under 500,000 in 2009. Early this year, the annual rate for new home starts reached 1.3 million. We have certainly risen from the lows, but we are not near the previous peak. Also, while new home construction has grown, inventory remains tight. Arguably, there is actually a housing shortage, which has helped to drive up home prices and boost aggregate housing wealth.

The U.S. housing market is still recovering from one of its greatest busts in history.

The growth in housing wealth — combined with the Tax Cuts and Jobs Act and strong advances in the equity markets — has been extremely positive for household balance sheets. Hiring has picked up, wages have been rising, and consumer sentiment has improved. These trends are likely to prompt more spending and help to boost the profitability of companies in the consumer sector. And while home prices have been increasing, they are still affordable, especially as household income rises. And while rising interest rates are certainly a risk to consider, rates are rising from abnormally low levels, and mortgage rates remain below their long-term average.

It's not just about new homes

Beyond housing starts, inventory, and home affordability, another trend to consider is home improvement. When housing wealth grows, even homeowners who choose to stay put tend to invest more in home improvement. In our meetings with the management teams of home improvement retailers, we've learned that 51% of U.S. homes in 2016 were over 40 years old. Industry experts are projecting this to increase to 54% by 2020. The older the home, the greater the demand for home improvement products, services, and supplies. This bodes well for many stocks in the consumer sector, particularly home improvement retailers and their suppliers.

An active, research-driven approach to investing in equities

Equity investing at Putnam features a tenured and talented team of portfolio managers backed by an integrated group of research analysts with worldwide reach. Our research organization is structured to focus fundamental analysis on the factors that matter most in global equity markets.

The power of independent research

Fundamental research has always been an important driver of security selection for Putnam, and we have recently taken steps to enhance our capabilities. We have made strategic additions while structuring research to analyze compelling long-term investment opportunities around the globe.

Our research team thrives in an entrepreneurial environment, opportunistically focused on developing differentiated insights. Our process encourages collaboration as well as out-of-the-box critical thinking. We balance tenure with sector rotation and new hires to sharpen analytical skills and encourage new ideas.


More from Equity Outlook
An active, research-driven approach to investing in equities

Equity investing at Putnam features a tenured and talented team of portfolio managers backed by an integrated group of research analysts with worldwide reach. Our research organization is structured to focus fundamental analysis on the factors that matter most in global equity markets.

EQUITIES AT PUTNAM
Aaron M. Cooper, CFA
Chief Investment Officer, Equities
Investing since 2000
Joined Putnam in 2011
Simon Davis
Co-Head of Equities
Investing since 1988
Joined Putnam in 2000
Shep Perkins, CFA
Co-Head of Equities
Investing since 1993
Joined Putnam in 2011