I've written a few columns recently on the shift in allocation of both disposable and discretionary income by consumers -- especially the younger generations after the baby boomers. This trend has become apparent since the last housing and financial market crises.
My last column examined the performance of sporting goods manufacturers. In this column, I'll briefly address the stocks of the gaming companies as well as leisure-related travel names, and then discuss the implications for the economy and monetary policy.
As was the case with the sporting goods companies, specialty retailers are greatly outperforming traditional retail stocks as well as the S&P 500. To save space I'm only going to look at the five-year returns of some representative companies in comparison to the S&P 500's 94% return over that period of time.
In the gaming space, Electronic Arts (EA), Activision Blizzard (ATVI), and Take-Two Interactive Software (TTWO) have returned 310%, 125%, and 182% respectively. I track a total of 48 stocks in this sector, but these are representative of the group's average returns, which again are well in excess of the S&P 500.
On the leisure travel side, Royal Caribbean Cruises (RCL) and Norwegian Cruise Line (NCLH) are up 194% and 100%, respectively. Carnival (CCL) has underperformed the S&P 500, with a 45% return.
In the general entertainment category, subscription video company Starz (STRZA) has soared 731% vs. only 46% for traditional movie distributor Regal Entertainment (RGC). The PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which has holdings across the sector, has a five-year return of 146%.
The pattern of consumption mentioned above, and the performance of the stocks catering to it, is nonsensical in traditional theory concerning the drivers of economic activity. These companies cater to discretionary income and their share performance should be lesser than the stocks of companies that have a traditional claim on income, namely housing and home furnishings.
The pattern implies serious consequences for the potential of the economy and financial markets, as well as for the application and viability of both monetary and fiscal policy.
Younger consumers appear to be flipping the traditional model of consumption by choosing to forgo housing and related products in preference for items that would typically be purchased only after those two were funded. This is somewhat akin to eating dessert before or in lieu of dinner, or reducing the food budget in order to increase the amount allotted for booze.
The complicating factor for monetary policymakers is that this greatly diminishes the ability of lower interest rates to stimulate traditional economic activity. It also implies that raising rates will not effect change in this nascent consumption pattern. This younger demographic has already chosen not to purchase a home and furnishings so raising the debt cost associated with doing so will not make an impact.
So the Fed is stuck in a position where its power to influence economic activity through the traditional route of manipulating the base cost of debt capital is greatly diminished. The boomers and older generations are still responding, but as they age and their consumption declines they too will be less affected by changes in the cost of debt capital.
The implications of this is that the economy is quickly becoming rudderless. Monetary policy has already been exhausted in the past five years and has failed to provide the catalyst for the younger generations to realign their consumption with traditional expectations. If this pattern continues, it further implies that the traditional model of debt-funded consumption that leads to economic expansions, fosters job creation and the virtuous cycle of consumption and production may also be no longer operable.
The most logical reason this situation has arisen over the past six years is due to the lack of growth in jobs and income, which is requiring a shift. The Fed has no ability to directly control job creation, though. It can only provide a catalyst.
It is probable, therefore, that the federal government will have to start increasing spending to directly create jobs. I discussed this in the columns, "Government Must Increase Spending," and "Government Contractors' Windfall Ahead."
I advise watching for signs of this soon as well as renewed interest in the infrastructure development plans announced by President Obama in the 2013 State of the Union address.