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What Traders Need To Know About The US Consumer In 2019

What Traders Need To Know About The US Consumer In 2019

The U.S. economy may soon be halfway to an earnings recession, with analysts now anticipating a 0.8-percent decline in fourth-quarter earnings compared to a year ago.

Where the economy is headed next will depend heavily on the U.S. consumer, and Bank of America Merrill Lynch economist Michelle Meyer recently outlined in a report what investors can expect from American consumers in 2019.

Supportive Consumers

Despite the bump in the road in Q4, Meyer said investors can expect consumers to be mostly supportive this year.

While U.S. companies are getting hit by the trade war with China, a more conservative investment climate and rising commodity and labor costs, Meyer said consumer confidence is extremely high and the job market is robust.

Low-income Americans are demonstrating particular strength in early 2019 thanks to wage growth, the economist said. 

“We expect this trend to disproportionately benefit lower-income consumers who have a higher propensity to spend incremental discretionary income." 

Discount retailers such as Walmart, Inc. (NYSE: WMT), Target Corporation (NYSE: TGT), Ross Stores, Inc. (NYSE: ROST) and TJX Companies, Inc. (NYSE: TJX) are particularly well-positioned to capitalize on healthy low-income consumers, Meyer said. 

Premium Demand

Higher up the consumer spending chain, Meyer said she's seeing evidence that consumers are more willing to pay for quality, premium brands. That’s good news for consumer staples companies with high exposure to premium products, she said — like Procter & Gamble Co (NYSE: PG). It also could help boost margins at retailers like Walmart, where the sales mix is shifting more toward premium products such as natural and organic foods.

The trend in favor of premium offerings could be good news for casual dining stocks as well, which have lagged their quick-serve competitors for the past several quarters, Meyer said. It’s also good for the leisure industry, she said, suggesting Americans are willing to splurge on higher-cost discretionary options such as cruises and other vacations.

Red Flags To Watch

Although Meyer’s outlook is generally optimistic, she said there are still a handful of potential red flags for investors to watch.

Rising interest rates, an escalation of the trade war with China and even price inflation could all potentially spook consumers at some point in 2019, she said. 

One example of a market that could be impacted by all three of these factors: the auto industry.

Higher interest rates will likely result in higher monthly payments, while tariffs could also lead to higher prices around the world, potentially hampering demand, Meyer said. 

So far this year, stocks have bounced back after a difficult 2018. The SPDR S&P 500 ETF Trust (NYSE: SPY) is up 9.6 percent year-to-date.

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