As we await the U.S. jobs report, I wanted to touch on a major shift that has occurred in the U.S. market in the last 5 years. The U.S. has long been known as the consumption mecca of the world. U.S. consumption accounts for more than 70% of our economy and is a major driver of product trends around the world. However, following the financial crisis, many analysts expected a shift in the U.S. economy from consumption back towards more fixed investment.
In fact though, U.S. consumers have been the driver of the bull market. So much so that the consumer discretionary sector has been the best performing major sector since the 2009 bottom in stocks, far outpacing the industrial sectors of the economy, including materials, energy, and manufacturing and industrial equipment.
Here is the 10 year chart of the ratio of the consumer discretionary ETF over the industrials sector ETF in the U.S. to illustrate this outperformance:
Following the consumer discretionary sector’s severe weakness in the 2007-2008 recession, it roared back to life and has been a leader ever since. The sector’s stocks are at a much higher level vs. other sectors (not just industrials, but materials and energy too) than at any point in the past decade. This is one main reason why the broader U.S. market has withstood the international weakness – the U.S. consumer continues to spend.
The U.S. consumer remains the lynchpin of the U.S. economy. The consumer’s health translates into stock market wealth, and the consumer’s ills translates into stock market spills. So while the short-term implications of the jobs report are much more murky (and might even be reversed), over the long march of time, a strong jobs backdrop is crucial for the continuation of this bull market.