From the early 1980s until the beginning of the Great Recession in 2007, conventional wisdom held that investors should never bet against the US consumer.
For almost three decades, a steady decline in US interest rates and lending standards supported a consumer spending spree despite relatively stagnant wages.
The indefatigable US consumer helped to pull the US economy from recessions in 1991 and 2001. In fact, despite the Sept. 11 terrorist attacks and a plummeting stock market in the wake of the tech bust, personal consumption expenditures—a good proxy for consumer spending on goods and services—remained in positive territory throughout 2001.
Over the 24 months ended Dec. 31, 2003, quarterly US economic growth averaged almost 3 percent, with consumer spending accounting for the bulk of that growth.
The 2007-09 credit crisis, housing market collapse and Great Recession marked the peak of the US consumer boom.
When real estate prices topped out and started to tumble, consumers could no longer tap their home equity to finance discretionary spending. And the worst financial crisis since the 1930s prompted banks and other lenders to tighten their credit standards, further crimping consumers’ buying power.
In the aftermath, consumers refocused on paying down debt and saving money, removing a key tailwind for retailers and consumer-discretionary stocks.
As we detailed in Will Retailers Rally Because of Lower Oil Prices?, the long-term shift in savings rates and credit conditions suggest that selectivity is crucial when investing in stocks leveraged to consumer spending. However, falling oil, natural-gas and agricultural prices are a positive for the US economy and some high-quality names in the group.