In a year marked by slowing growth across many industries and regions, the U.S. consumer sector has been a notable exception. Businesses in the sector have delivered financial performance at levels we haven't seen since before the 2008 global financial crisis. In September, consumer confidence reached an 18-year high, while unemployment has been declining and wages are rising. As U.S. equities continued to rally in their ninth year of a bull market, stock market wealth has contributed to consumer spending and sentiment. Another boost for consumers comes from housing wealth. New home construction has grown and inventory remains tight, which has helped to drive up home prices.
U.S. retailers have been remarkably strong, with top-line growth for many businesses exceeding expectations. Walmart announced its best results in over a decade with comparable-store sales growth of 4.5% for the latest quarter.
The question for investors is whether this strength is sustainable, and we believe there are reasons for both optimism and caution. Our caution is most applicable to retail stocks, where valuations may be stretched. We believe many recent performance drivers for retail stocks are temporary. Tax reform, for example, boosted income for many individuals in the form of one-time bonuses. Comparable store sales benefited from extremely cooperative weather after difficult weather in the prior quarter. Also, the U.S.–China trade dispute could cause headwinds given the likelihood that tariffs will result in higher prices that would discourage consumers.
On the other hand, some longer-term trends could extend outperformance in the U.S. consumer sector. Tax reform benefits for corporations may take longer to play out, as businesses plan to reinvest tax savings to support long-term growth — in the form of new facilities, equipment, or expanded workforces, for example. Also, the trade conflict could be supportive for businesses as price inflation can improve profitability. Housing wealth should continue to benefit stocks in several industries. While interest rates may be rising for home buyers, they are doing so from historically low levels.
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