Long Retail, Short Discretion. Disposable Income Update

In this report, we examine recent data on disposable income, focusing on Personal Consumption Expenditures (PCE) and trends in luxury goods consumption. The analysis confirms that markets are efficiently reflecting these trends, with valuations appearing fairly priced across the board.

The chart of luxury search trends provides a clear visualization of the week-over-week interest in various high-end brands. Since the initial shock of COVID-19, search behaviors have stabilized, and the current landscape reflects a sustained and healthy engagement with luxury brands, signaling a positive outlook for the market.

This chart tracks the quarter-over-quarter growth rates, seasonally adjusted at an annual rate, for U.S. Personal Consumption Expenditures (PCE), broken down into goods and services, alongside overall GDP. The data highlights significant volatility in 2020, with a sharp downturn followed by a rapid rebound, reflecting the economic impacts of COVID-19 and subsequent recovery. Post-2020, the growth rates for goods, services, and overall PCE show a convergence towards a steadier, more moderate growth trend, indicative of a stabilizing economy as it adjusts to post-pandemic conditions. Heading into 2024, the PCE for goods and services, along with GDP, are on a similar trajectory, suggesting a balanced growth pattern across these economic sectors.

In the chart above, we notice that real consumer spending month over month has been negative. We did see an uptick in rates across the treasury complex, which could have been a contributing factor in otherwise flat growth trends in spending. Nevertheless, perhaps the price charts / technicals of consumer sensitive names could give us further insight into where the data might start to to turn. 

If disposable income were to decrease, retail stocks are often among the first to feel the impact. This is because retail companies are directly dependent on consumer spending, which is fueled by the amount of income consumers have available for non-essential purchases after taxes and necessary living expenses. A contraction in disposable income typically leads to reduced consumer spending on retail goods, particularly those that are considered discretionary. As consumers tighten their belts, retailers may see a decline in sales revenue, which can quickly translate to lower stock prices as investor sentiment adjusts to the expectation of decreased earnings for those companies. The immediacy of this effect on retail stocks comes from the sector’s close connection to everyday consumer spending behavior.

The chart below shows the XRT ETF indicating a DeMARK propulsion up move to the 90+ area. This is a base breakout of a bottoming pattern that has been forming for years. If the market was worried about a tightening consumer, retail would be one of the first places to see it. 

If economic conditions were to decline, Starbucks, as a bellwether for consumer discretionary spending, would likely see its stock price weaken. This could happen as consumers cut back on non-essential purchases like specialty coffee and dining out to manage tighter personal budgets. However, if Starbucks’ stock were to reach a bottom and then begin to recover, it would potentially signal a turnaround in consumer confidence and discretionary spending. Such a rebound could reflect our data findings. 

Looking at consumer discretionary stocks such as Apple (AAPL) or Nike (NKE), current observations suggest a weakening trend.
 
AAPL should see a short-term bounce from a technical perspective, but this chart from a weekly/monthly structure has invalidated major up trends and momentum factors. 
 
 
MAR (Marriot) has a Monthly DeMARK 13 sequential which we have not seen since pre-covid. 
 
NKE has qualified DeMARK downside targets to new lows below the 2023 levels. 
 
In short, consumer discretionary stocks look rather weak with retail really showing relative strength. One way to play this is to continue playing that trend. 
Below is a chart of the XLY/XRT ratio. 
I am looking for the recent decline to continue. 

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