The Daily Dose: Consumers Curb Their Enthusiasm

 | Nov 01, 2013 | 11:00 AM EDT
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You should set aside a block of time each week and ask yourself questions on the markets. Call it a self-interview. Oh, and it's good to write these thoughts down in order to have a template to execute upon. Below is an example of a recent interview I gave myself. 

Q: Obviously, many data points are backward-looking, but what should we expect from the consumer in the future?

A: The consumer story in the here and now is that he or she is living for today and not necessarily for the future. What do I mean by that? A great example was seen during the back-to-school season. Consumers waited and waited to buy back-to-school items, choosing to snag them last minute at better prices than in August. They simply saw no reason to tie up money they needed to live a certain way in August in order to invest in clothes and binders that won't be used until over a month later. Economic message: Higher stock and housing prices are not changing the buying behavior of the average U.S. household (for average, think under $100,000 annual pre-tax income, two kids, maybe a dog). Yes, higher values for those things you can't see do provide a sense of comfort, but bi-weekly checks with three years of meager hourly wage increases are what pay the bills. Remember that food and shelter consume about 50% of a household's annual budget. 

Q: Will sentiment turn around for the holidays?

A: It hurts to be a hater on Santa, here is the reality. Sentiment will in fact improve from where it is now, but that is following a post-government-closing plunge. So we will be returning to sentiment levels, say in November and December, that may look like the ones from a couple months ago, when consumers weren't out there spending, spending, spending. Consumer land remains a land of mediocrity, of scrimping, cutting corners, just to make that purchase of the newest piece of glass and plastic from Apple (AAPL). And when that saved-up splurge is made, the consumer is done, and then hopes a more financially sound baby boomer swoops in and spoils them for a holiday.

Q: Is there "gloom and doom" beneath the surface, or is this just a reflection of government shutdown/fiscal worries?

A: I wouldn't say gloom and doom. I would characterize it as sustained mediocrity. Households are just not expecting much. They have learned to live a certain way post-recession. They value materialistic items differently. They are still asking themselves, "Do I need this?" I walked into a Family Dollar (FDO) store recently to talk with consumers. They tell me they just visit for food to make it to the weekend, not discretionary merchandise. To me, this is abnormal recovery type stuff and a sign that higher stock and home prices don't filter down to those who are in real need of money.

Q: Where does the middle class fall into all of this? If they aren't buying that Macy's (M) shirt now, how will they be spending money for the holidays?

A: Here is the attack plan for the middle class. Drill down into what their child really wants in terms of big-ticket items. We have some major items coming out in the new game consoles from Sony (SNE) and Microsoft (MSFT), as well as a range of new offerings from Apple. If the consumption pattern of 2013 is any indication, you are still likely to see a hesitance to putting items on a charge card. If items are put on a charge card, it will be the aforementioned big-ticket goods and not the five shirts from Macy's. For retailers, this means unplanned markdowns, or a bunch of companies entering the holiday season more promotional than they had planned.

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