Top Fund Manager: A Sharp Uptick In Consumer Spending Could Be Coming

Cory S. Krebs is a CFA and portfolio manager of the Catalyst Dynamic Alpha Fund (CPEAX).

Investors began 2015 considering the implications of elevated equity valuations in the light of softening economic data points, particularly in an environment of potentially shifting central bank policy.

Stocks fell to monthly losses in January, opening the year in the red. U.S. equities quickly regained their footing in February and rallied to new all-time highs before the close of the second month on the strength of cyclical, growth-styled investments. They concluded the quarter by trending sideways for much of the month of March.

Investors struggled during this first quarter to reconcile the ramifications of potentially higher short-term interest rates on an economy which may be showing signs of slowing or the effects of poor weather conditions.

Sound familiar?

That’s because it is fundamentally identical to the first quarter of 2014. For all that has changed in the twelve elapsed months, the principal challenges in the equity markets remain essentially unaltered and the commiserate actions of investors, in light of these dynamics, has been strikingly similar.

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But there’s one big differentiating factor: the recent slide in energy prices.

This has shaped economic results at both the micro and macro-economic levels. The slump in oil has produced a significant deterioration in industrial economic strength, with disappointing results in the mining sector in GDP calculations and in the energy sector’s corporate earnings.

The expected beneficiaries of falling gasoline prices—consumers—have yet to show a willingness to spend their newfound discretionary income. The household savings rate has risen smartly over the preceding quarter, but the likelihood of this scenario persisting is low. Historically, households have typically waited about six months before spending unexpected discretionary income.

A sharp uptick in consumer spending may await in the forthcoming quarter.

In spite of these economic challenges, equities, to this point, have provided persistently resilient results and confounded the myriad of investors waiting on the sidelines for a more compelling entry point.

While there are signs that the domestic economy has recently cooled due to a combination of weather effects and falling industrial activity from the energy sector, the current environment remains far from recessionary. The yield curve remains upwardly sloping and global monetary policy remains accommodative.

With earnings momentum slowing due to pressures from a rising dollar and falling oil, an uptick in consumer spending could greatly mitigate these forces in the coming quarters. The blended corporate growth rate for equities is anticipated to fall into negative territory in the upcoming quarter. However, earnings, excluding the energy sector, are expected to rise about 3 percent. This may affect the durability of equity gains in the early stages of the year.

The second half of 2015 could prove more beneficial to investors, as households feel more comfortable spending their gasoline savings. Increases in equity volatility and commiserate return dispersion should provide a solid backdrop for active equity money management. There’s much reason to believe that equities will provide a compelling risk reward profile, particularly when judged against the merits of other investment classes.