Value offers a cushion: Why last year’s winners are now losers (Part 3 of 6)
Today, however, U.S. consumption is not accelerating as fast as expected, despite an economy that is improving from its first quarter slump. Growth in retail sales is sluggish, rising barely 0.2% a month, roughly half the long-term average. (The exceptions are interest-rate sensitive segments like autos, which have found support in the low interest rate environment.)
Market Realist – Consumer spending in the US remains low
The graph above shows consumer spending in the US. As you can see, consumer spending has been inching up very slowly since 2012. This is surprising as the gross domestic product (or GDP) growth in the US (SPY)(IVV) has been robust. The US GDP grew by 3.9% in 3Q14, which was preceded by 4.6% in 2Q14. This means that Americans are saving more.
Consumption is the biggest driver of the US economy. It accounts for close to 70% of US GDP. Consumer spending has been relatively subdued since the recession, as Americans have increased their savings rate. This has impacted the retail sector (XRT) adversely.
However, low consumer spending hasn’t affected the automobile sector much. Automakers like Ford (F) and General Motors (GM) have benefited from the low interest rate environment. Low cost of funds encourages individuals to buy consumer discretionary (XLY) like cars.
Please read the next part of the series, which explains why you need to consider buying mega- and large-cap stocks.
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