Consumer discretionary is a major stock market sector and you can usually glean good information about the consumer. It’s really difficult to believe that a recession is close at hand if this sector is at or close to new highs. In 2011, when recession calls were abound, I looked at the chart below and saw a new high for the consumer in June. When the stock market collapsed under the weight of Greece, threat of U.S. default and the S&P downgrade of our debt, the sector went down as expected.
One reason I did not see a recession coming was that it’s very unlikely that the consumer stocks peak and then recession hits within the next few months. Usually, there is much more lead time, like 6+ months, for the consumer to weaken.
In 2001 as you can see below, the consumer sector saw its high a full year before recession hit. That recession, spurred on by the Dot Com bubble bursting and accelerated by 9-11 was brief and generally mild although the multi-year bear market in stocks was severe.
Below you can see the action before the Great Recession hit. The consumer sector peaked in the middle of 2007 and then weakened dramatically to year-end when the recession officially began. I remember living this in real time and I did not believe that recession was hitting late in 2007. I saw weakening, but my original thought was that the dramatic cut in interest rates would stave off recession at that point. I was wrong.
So where is the consumer today?
As you can see below, consumer discretionary saw an all-time high just a few short weeks ago. That makes it very difficult to believe that a recession in the U.S. is in the cards this year. I am not going to use the word “never”, but after you read the next blog, it’s really hard to argue that case.
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