Weekly Investment Strategy

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Hopes that fiscal stimulus deal is still ‘in the picture’
• ‘Refocusing’ our lens on the consumer discretionary sector
• Disparities between retailers won’t be over in a ‘flash’

This past Wednesday was World Photography Day, a day to commemorate the contributions made to photography as well as to celebrate the importance of images in our everyday lives. To partake in the holiday, I reflected upon the images that have been captured around the world as a result of the COVID-19 pandemic—which was outside anyone’s viewfinder when 2020 began. From a desolate Times Square to the deserted Shibuya Crossing in Tokyo, the photos of empty streets that would’ve traditionally been crowded with commuters and tourists were almost surreal. But as it relates to investment strategy, the virus caused the economic and financial landscapes to become anything but black and white, and these complexities certainly required us to refocus our lens. While a panoramic view of broader economic and market developments will always be a crucial shot when constructing our outlook, sometimes it is important for us to bring certain sectors into focus.

• The Big Picture: Consumer Spending Is The Focal Point Of The Recovery | In constructing our outlook for the rest of 2020 as well as for next year, we highlight the importance of consumer spending, which accounts for ~70% of US GDP. In fact, prior to the outbreak, a resilient streak of growth in consumption was the primary factor for continued economic expansion. However, the unexpected, prolonged shutdowns combined with historic levels of job losses caused personal consumption expenditures to contract nearly 35%. As we look ahead, the pace at which workers return to work and the hope of a sizable fiscal stimulus deal aimed directly at pockets of citizens (e.g., a second round of stimulus checks, additional unemployment benefit) will dictate the strength and durability of this economic recovery until a vaccine or therapeutic can bring the economy back to normality.
• Zooming In On The Consumer Discretionary Sector | In photography, the interpretation of an image is left to the viewer and there always appears to be more than meets the eye. This is also true of the Consumer Discretionary sector, one of our preferred sectors. A quick ‘snapshot’ shows it is the second best performing sector year-to-date (up 23.5%), trailing Info Tech by only 4.6%. However, ‘refocusing’ our lens on sub-industries and companies within this sector ‘shines light’ that selectivity is especially essential during these unprecedented times. In fact, the spread between the best and worst performing company within the sector is more than 150%! Shifting consumer habits and social distancing has led retailers focused on non-luxury items with a dependable e-commerce platform to experience positive performance, sales, and earnings per share growth when compared to luxury retailers more dependent on in-person interactions. From a market perspective, non-luxury companies have a bigger impact on the market as they have a total market cap 24x the size of the luxury names ($2.7 trillion vs $110 billion) and 24x times more sales ($1.2 trillion vs $52 billion).
• Non-Luxury Retailers Not Camera Shy | As stay-at-home orders were mandated, the demand for necessity, or non-luxury, items increased as ~90% of us were spending additional hours at home rather than at work or elsewhere. In addition, while guidelines varied by state, most of these non-luxury retailers were allowed to remain open during the lockdowns. As a result, these non-luxury companies have outperformed luxury retailers by ~54% (47% versus -7%) year-to-date. This level of outperformance seems justified as during the second quarter, luxury retailer sales declined ~36% versus non-luxury sales increasing ~17%. Over the same time period, earnings per share results declined ~144% for luxury retailers in contrast with a 38% increase for non-luxury companies. This disparity is unlikely to be just a ‘flash’ given the acceleration of two trends we had previously noted—online shopping and the transformation of consumers to being more frugal and cost-conscious.
• E-Commerce Platforms Help Capture Consumers | Our belief that the US economic recovery would resemble the letter “K” underneath the surface has proven to be a ‘high resolution’ portrait of what has unfolded. This rationale was based on the premise that various industries would recover from the pandemic at a different pace and magnitude. In particular, the upper portion of the “K” had industries with a more technology-based or e-commerce driven business approach. In fact, a strong online presence is one of the catalysts driving the divergence between non-luxury and luxury retailers, as luxury brands are often more dependent on in-person sales. This overall trend has led e-commerce sales as a percentage of total retail sales to reach a new peak (21%), more than double the level seen in 2010. Some companies have even recorded online sales nearly triple pre-pandemic levels! Online retailers were already gaining popularity due to sheer convenience, but the added health benefit has encouraged more consumers to reconsider traditional shopping habits. Incidentally, this shift has benefitted other industries as well, such as the air freight and logistics companies (a subsector of Industrials) that have processed this uptick in online orders.

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.