Reopening stocks at risk of consumer spending slowing down

Where did all that stimmy go? First to trading accounts, and now to bars, restaurants and of course, more AMC stock.

Reopening stocks: News broke yesterday that American retail sales fell 1.3% in May after rising 4.7% in March and 0.9% in April. While spending has likely shifted from retail to restaurants, travel and services – many are wondering – how long will the government stimulus-driven rebound last?

Out with the cars, in with the bars

Once the pandemic hit, consumer spending fell off a cliff. But after spending soared in March, many thought it would continue to surge all summer due to:

• Rising vaccination rates: Over half of US adults are now fully vaccinated.
• Weakening business restrictions: At least 28 states have fully reopened, with many other relaxing restrictions.
• Pent-up demand: US households saved $2t more last year than they would’ve without the pandemic – and now they have a chance to spend it.

They weren’t wrong. People are spending more on services (ie. bars, restaurants, and much-needed haircuts) – but it’s been offset by less spending on goods. A large part of this is the decline in spending on cars, which have jumped in price due to the semiconductor shortage.

No stimmy lasts forever

According to David Rosenberg, former Chief Economist of Merrill Lynch, the spending boom might be over a lot sooner than anticipated:

• Elevated personal savings rates: Households are expected to save 3% more than they did before the pandemic.
• End of government stimulus: Household income fell 13.1% in April after $1400 stimulus checks were handed out in March.

Looking to the East, China was months ahead of the US in reopening the economy. Despite a strong initial rebound, China’s retail sales slowed significantly in recent months – with economists blaming it on weak income growth.

Not apples to oranges comparison: Chinese consumers haven’t received as much stimulus as the US but what we can takeaway is that the surge in extra spending won’t last forever.

Investors: Capitalizing on reopening stocks

Over two dozen actively managed funds climbed over 20% this year, with the best performers investing in so-called reopening stocks – companies benefiting from a reopened economy (i.e. financial, retail, oil stocks etc). But stocks are forward-looking – i.e. current prices reflect future expectations – and times are changing…

• In the past 6 months, investors expected a strong rebound in spending and many reopening stocks shot up before the economy even reopened.
• With early signs of spending slowing, investors can prepare by taking some profits on their reopening trade while the going is good.

Contrarian move: Finding value in tech stocks again and Chinese stocks