The American Consumer Is Thriving. Here’s Why We Shouldn’t Ignore It…

Shoppers have been out in full force lately, undeterred by recent rate hikes and the inflation that triggered them. In fact, January’s retail sales report was the strongest in two years, confounding analysts. Department stores, for example, posted a healthy 17.5% increase, buoyed by electronics, furniture, home appliances, and other durable goods.

Buyers drove away with 1.04 million new cars and trucks for the month, a healthy 5% increase from a year ago. And that’s with consumer confidence readings pulling back a notch. Visa and Mastercard report a noticeable increase in transaction activity, with the latter saying consumers have shrugged off macro uncertainty and appear to be “remarkably resilient.”

It’s telling that the luxury goods category just posted a powerful 45.3% year-over-year increase. That little bit of market intelligence further confirms that consumers are spending freely on things that are certainly not necessities.

The robust labor market deserves some of the credit. Payrolls nationwide expanded by 517,000 positions last month, driving unemployment to the lowest level since 1969. Wages have risen briskly and will likely climb even further, considering there are still 11 million job openings, outnumbering available workers by a 2-1 margin.

Source: Bureau of Labor Statistics

Needless to say, more paychecks is a bullish sign for consumer spending patterns. At the same time, 70 million Social Security recipients just got an 8.7% cost-of-living bump in their monthly payments — the biggest in 40 years. More disposable income circulating through the system.

I’m not surprised by the recent hiring binge. Incredibly, though, one-fourth of it came from a single group: leisure and hospitality (which added 128,000 additional workers). That dovetails with a trend that has become glaringly obvious: people are getting out more.

Inflation hasn’t really dented travel plans. A recent Forbes poll found that nearly 90% of Americans plan to travel the same or more in 2023 than they did in 2022. That might be anything from simple weekend getaways to lavish beach villa vacations.

The evidence is all around us.

Despite embarrassing scheduling snafus that led to 16,000 flight cancellations last quarter, Southwest Airlines still posted record revenue in excess of $6 billion, driven by a 20% jump in passenger revenue per available seat mile (PRASM).

Across the country, roughly 2.5 million fliers are now passing through TSA airport security checkpoints on busy days. If you recall, we talked about soaring global air traffic not long ago as part of my recommendation of Air Lease’s (NYSE: AL) preferred stock.

That demand is reflected in a 40% spike in average airfare over the past year. That’s five times the rate of inflation. And with capacity still restricted, rates are expected to remain elevated through at least next fall. Still, many flights are full, if not overbooked.

I’m Bullish On Cyclical Consumer Stocks…

Here’s why I bring this up…

What do Disney (NYSE: DIS), Delta (NYSE: DAL), Expedia (Nasdaq: EXPE), and Carnival Corp (NYSE: CCL) all have in common?

Believe it or not, none of these mature companies currently pays a regular dividend. Each was forced to suspend payments during the early stages of the pandemic. They haven’t resumed, either, despite a sharp pickup in travel. They aren’t alone.

Even outside of the travel sphere, dozens of major consumer-facing companies can’t or won’t commit to dividends. Chipotle Mexican Grill (NYSE: CMG) has never paid one, even before Covid. Neither has Monster Beverage (Nasdaq: MNST). Or Dish Network (Nasdaq: DISH). Or PayPal (Nasdaq: PYPL).

I’ve sung the praises of non-discretionary stocks many times over the years for their strength and resilience. And my closed trades list over at High-Yield Investing is full of all-weather performers such as National Grid and H&R Block. Regardless of interest rates or GDP growth, people still have to turn on the lights and file their tax returns.

But we’ve flipped the script lately. If you take a quick look at the active consumer-oriented holdings in our High-Yield Investing portfolio, you will notice they deal far more with wants than needs. Big ticket ones at that… boats, RVs, home theatre systems.

Closing Thoughts

Is this an aberration from the norm? Perhaps. But I stand by it. The numbers cited above are just too powerful to ignore. Plus, some important generational shifts are happening in consumer behavior, too, which favors more traditionally cyclical names.

We’ll save that for another time. But the bottom line is this…

For a while now, the narrative has been that we’re headed for a recession. But it is hard to ignore what’s going on with consumer behavior. And if you’re an income investor, this isn’t really the first place you look for high-yielders, either. Don’t make this mistake.

There are choices out there — like Best Buy (NYSE: BBY), for example. The well-run company carries a 4% yield — more than twice the market average. If you’re looking for portfolio that pay nice yields but also offer some upside, this is one of the first places I’d look.

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