Consumer Confidence Falls But Remains Robust: 5 Top Picks
Zacks Investment Research | Nov 28, 2018 07:06AM ET
Consumer confidence slipped from an 18-year peak in November, the first such decline in five months. Fresh data from the Conference Board reveals that the outlook for business conditions has dulled. Respondents are also unsure about how fast their income will grow next year.
However, the index remains at an appreciably high level. Further, consumers are confident that economic expansion will continue in 2019. Significantly, the confidence in the job market remains undimmed, with unemployment at a near 50-year low.
Notably, consumer spending makes up nearly 70% of U.S. GDP. And despite the slight decline in confidence, American consumers remain an upbeat lot. This is why it makes sense to invest in consumer discretionary stocks heading into the New Year.
Outlook for Future Business Conditions Declines
The Consumer Confidence index declined from 137.9 in October to 135.7 in November. However, it still came in above the estimated level of 135.4. The Present Situation Index, which gauges consumers’ views about current market conditions, inched upward from 171.9 to 172.7.
This measure of the current state of the economy is only marginally lower than its highest level in 18 years. However, the Expectations Index, which is a measure of the short-term outlook, declined from 115.1 to 111.0.
Per Lynn Franco of the Conference Board, this was “primarily due to a less optimistic view of future business conditions and personal income prospects.” Analysts believe that this is a reflection of the recent stock market turbulence and concerns about trade conflicts and rising interest rates.
Robust Labor Market Fuels Consumer Resilience
The need to closely monitor consumer sentiment stems from the fact that consumer expenditure makes up nearly two-thirds of U.S. GDP. Currently, consumer spending is in ruddy health, increasing at a 4% annual pace from July to September, the fastest pace since late 2014.
Robust consumer spending is in turn fueled by a strong labor market. Currently, the unemployment rate is near a 50-year low of 3.7%. This is exactly why the number of respondents, who believe jobs are “plentiful” increased from 45.4% to 46.6%, the largest share since January 2001.
According to Franco, “consumers are still quite confident that economic growth will continue at a solid pace into early 2019.” Analysts believe that despite a small slip in confidence and a recognition that economic growth may be slowing, consumers remain upbeat. The resilience in consumer spending is the best indicator of their confidence.
Our Choices
Despite, the marginal decline in consumer confidence, American consumers remain optimistic about current prospects. They do remain concerned about income growth in the future, though. Further, there is a recognition that growth may moderate in 2019. But the pace of expansion should still remain fairly robust.
Given that consumer confidence remains largely resilient, supported by a robust labor market, consumer discretionary stocks are once again strong bets. This is because personal consumption makes up two-thirds of total GDP. However, picking winning stocks may be difficult.
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