NEW YORK (Reuters) - American consumers are spending.
That’s the message of top fund managers and strategists, who say consumer resilience in the face of a slow-growing economy may make the consumer sector a good place to invest in 2016.
“The consumer, we continue to spend money, we’re happy to spend money, when we’re depressed we spend money,” said Ed Yardeni, president of Yardeni Research Inc in New York. “The world is, once again, very dependent on the American consumer.”
Participants at the Reuters Global Investment Outlook Summit said falling unemployment, rising wages, low oil prices, cheap imports and relatively low interest rates throughout 2016 will encourage consumers to open their wallets more.
A series of high-profile earnings disappointments among retailers, particularly clothing sellers, and U.S. government reports suggesting spending has abated has worried some investors.
But participants at the Summit said changing consumer habits are a reason apparel companies have been hit, while other companies have not.
“The question for me is simple: Why are people not buying clothes?” said Mario Gabelli, who oversees $39.6 billion at Gabelli & Co in Rye, New York. “Is it the weather? Is it tourism? Retailers like O‘Reilly are doing fantastic, retailers like Home Depot are doing fantastic.”
O‘Reilly Automotive Inc (ORLY.O), which has more than 4,400 auto parts retailers, is one of Gabelli’s picks, even after its share price had more than doubled since the start of 2014.
Gabelli said he is also focused on “changing consumer patterns,” such as how people now read ingredient labels more carefully.
To that end, he owns General Mills Inc (GIS.N), which makes Cheerios cereal but also owns Yoplait yogurt and recently bought Annie’s Inc, maker of organic macaroni-and-cheese.
Summit participants made their assessments as Fed governors suggested in speeches this month that it may finally be time to raise interest rates for the first time since June 2006.
In the minutes from its latest meeting, the central bank signaled that a December hike is possible so long as it remained confident the labor market was healthy, wages will increase and inflation can rise toward the Fed’s preferred level.
Dean Maki, chief economist at billionaire Steven A. Cohen’s Point72 Asset Management in Stamford, Connecticut, noted that consumer spending grew in the third quarter at a 3.2 percent rate, dwarfing the rate of inflation.
“That’s precisely what should happen when gasoline prices fall: headline inflation declines, and real spending grows faster,” Maki said. “Consumer spending continues to be the main driver of expansion.”
Margie Patel, senior portfolio manager at Wells Capital Management, which invests $348 billion, expects wages in 2016 to rise about 1.5 percentage points faster than inflation.
The Boston-based manager said rising wages could prompt consumers to spend more online, helping brick-and-mortar retailers such as home improvement specialist Home Depot Inc (HD.N) that are ramping up their Internet presence.
She was also high on cars. Annual sales from General Motors Co (GM.N) and others are potentially on track to eclipse the approximately 17.35 million units sold in 2000.
“We still have a couple more years left for the auto up cycle,” Patel said. “It’s one of the best real-time indicators for what is the real health of the consumer.”
The outlook is different for clothing retailers, which have struggled with excess inventory as shoppers hunt for bargains online.
From mid-July to mid-November the Standard & Poor’s Select Retail Index .SPSIRE fell as much as 18 percent, a much larger drop than for stocks generally.
“I don’t think that those retailers missing expectations can really blame a weakening consumer, because others are clearly benefiting,” Maki said.
More broadly, summit guests noted that consumer sentiment remains strong, having this year reached its highest since 2004, according to University of Michigan data.
“It’s rare that you see us entering a recession without consumer confidence rolling over first, and we’re not even close to that, so that makes me feel better,” said Gregory Peters, who helps invest $565 billion as senior investment officer of Prudential Fixed Income in Newark, New Jersey.
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Reporting by Jennifer Ablan and Jonathan Stempel in New York; Editing by Dan Grebler