Market update on the United States

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The business cycle can be generally tracked by the country’s level and changes in economic activity. For the US, consumer spending represents more than two thirds of the country’s Gross Domestic Product and is typically the most important business cycle factor. With consumer spending so far supporting the economy during this 16-month US China trade war, investors aim to understand the US consumer by reconciling top down macroeconomic data with a bottom up earnings analysis.

Personal consumption is dependent on disposable income, which represents the income remaining after deducing for taxes and social security charges. On the back of a resilient US labour market, disposable income retained its upward trend. Despite reaching an all-time high last September, the US savings rate remains elevated compared to recent years.

Retail sales are also considered an indicative signal to the strength of the US consumer. US retail sales bounced back up in October and reversed the contraction reported in the previous month. Retail sales grew at the lowest level since last May, up 3.1 per cent on a year on year basis

US consumer sentiment data that came in earlier this month also missed expectations but the sentiment index inched slightly higher and currently stands at a four month high.

With third quarter earnings season almost behind us, a look at the consumer discretionary sector gives investors insightful information on the US consumer. The consumer discretionary sector categorises companies whose products are considered non-essential, such as durable goods, apparel, entertainment and automobiles. Almost all of companies in the S&P 500 which are classified in the consumer discretionary sector have reported their earnings results for the third quarter. According to Bloomberg data, the US consumer discretionary market in aggregate recorded a 7.02 per cent growth in sales while earnings growth remained flat.

More specifically, companies grouped under the retail industry, in aggregate reported double digit sales growth. On the earnings side, however, retail companies reported a 2.6 per cent decline in earnings growth over the quarter. This implies that corporate profit margins are being squeezed in the current economic environment. Despite being negative, the decline in earnings growth was in line with market expectations.

In fact, retailers issuing their results this past week also support this mixed view with bellwether companies such as Walmart and Target signalling strong spending patterns while other companies such as Home Depot reducing their forward guidance. However, one must keep in mind that earnings results are subject to seasonality and full year results should give us a better picture on the retail market. In fact, fourth quarter earnings are subject to Black Friday sales initiatives and the holiday season.

Overall, the bottom up perspective seems to confirm the macro story, which is that the consumer is still spending but US economic growth overall is slowing. The key question is whether consumer spending will continue to be enough to offset the weakness in business investment going forward.

Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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