consumer/business divergence in the US

I’m in the hospital today with my son, while he donates bone marrow stem cells to a cancer patient.   So only a short note today.

So far, there seems to be a sharp divergence in the US in approach toward the upending fiscal cliff between the behavior of consumers–who have spent up a storm on Black Friday and Cyber Monday–and businessmen, who have cut back their spending and refrained from hiring new employees.

We can see this difference reflected clearly in the relative performance, quarter to date, of the Consumer Discretionary sector, which is the best performer in the S&P 500 at +1.3%, and the IT sector, which is the worst at -6.1%.

(You may be thinking, “What about the Industrials?”.  That sector is, at +.7%, is also an outperformer (the S&P itself is -1.7%, qtd, by the way).  But if you look a the sector’s constituents, they mostly make stuff that’s used directly by consumers, like lawnmowers or snowblowers, or in residential housing construction.  So it’s really a consumer sector, too.)

IT is the largest sector in the S&P 500 and Consumer Discretionary is #3, so the contrast expressed in the pessimistic trading of the former vs. the optimism portrayed in the latter is worth thinking about.

I’m not sure why this is happening.

It’s possible that professional investors are figuring that domestic consumers will be buoyed by recovering house prices while businesses have been enjoying the benefits of ultra-low interest rates for quite some time.  Therefore, Consumer Discretionary is the lesser of two potential evils.

It’s also possible that consumers are oblivious to the fact that without action in Washington their paychecks will shrink considerably come January, while businesses do better planning.  In this case, we could see a sharp reversal of both sectors’ recent fortunes around mid-January.

There may well be other factors than the fiscal cliff involved.  For example:  because Thanksgiving was so early this year, the holiday spending season is the longest possible–and typically the more shopping days, the more Americans spend.  a plus for Consumer Discretionary.


Developments in these sectors could give valuable clues for year-end portfolio repositioning.  So they’re worth keeping an eye on.

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