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The Times They Are A-Changin’

Stephen Roseman

Since the U.S. credit crisis began, economists and investors alike were taken aback by how well consumer spending held up, especially for relatively “small ticket” consumer discretionary items—iPads, shoes, handbags, dining out, et cetera.  In a nutshell, people were spending on small-ticket  “feel-good items” while relatively big-ticket durables (appliances, cars, houses) bore the brunt of the consumer slowdown.

Well, to quote a young Bob Dylan in 1964, “the times they are a-changin’.”  Fast forward to 2013, and many auto- and home-related businesses are going gangbusters.  We’re now seeing the inverse of what we saw over the past five years.  Now companies from restaurants to apparel and cosmetics retailers can’t explain their sudden, relative slowdown.  In the meantime, auto dealers are putting up year-over-year positive growth numbers that in some cases, they have never seen before.  Purveyors of pricey home décor, appliances and furniture are continuing to surprise to the upside, driven by seemingly insatiable consumer appetite.

So, what happened?  It’s likely the rebounding “wealth effect.”  As was well-documented in the recessionary period after the credit crisis, as well as the dot-com bust, as people lost wealth in their homes and/or retirement savings, whether on paper or realized, they reined in spending dramatically.  The inverse of that dynamic has taken hold again, as it did after the dot-bust.  In brief, from where I sit, consumers’ shopping habits have shifted from “income statement” related small purchases to “balance sheet” related large purchases.  Said differently, the items that require good credit, and potentially financing—houses, cars, RVs, boats, et cetera—are enjoying a massive resurgence from the (deep) cyclical lows they fell to post-crisis.  This is one of the outcomes that the Fed had hoped for with a cheap (free?) money  policy. 

The sales recovery of items big and bigger is driving companies that make big things to do well and increase hiring. In turn, this drives better confidence and ultimately more spending on big things.  Well, little things, too, as demand for small-ticket items is fine.  But it’s the pace of the big-ticket recovery that is breathtaking.  We truly look to be in a stock-picker’s market, with big differences in how companies are executing and winning market share.  How long can it last?  Stay tuned. We can hope that we’re singing a different Dylan tune:  “Don’t think twice, it’s all right.”

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

The information in this report should not be considered a recommendation to purchase or sell any particular security.

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