Major shift in consumer sentiment looms
The high-end consumers are about as sanguine as we have them in quite some time.
We have recently witnessed an overshoot in real-world consumer sentiment and as is true in the case of all overshoots, a correction now looms. Overshoots and undershoots happen regularly throughout economic cycles, but it is much more difficult to observe on a ground floor level unless you spend time on the ground floor.
Economists with cubicle offices in tall buildings in large metropolitan cities who work in the traditional corporate world are often blind to these ground floor observations, but we may have just seen a major peak and if a reversal begins it could be material to the health of the consumer going forward.
A material shift in consumer sentiment seems to have begun, and if it is anything like the past the result could bring the high end of the market back down to reality and significantly change the otherwise sanguine environment that has existed. This is a hands on observation, a "Random Walk" if you will, and something that traditional economists miss. But there may be a material change soon.
Using these same "Random Walk" indicators, an undershoot in consumer sentiment occurred in the middle of 2009, a couple months after the market bottomed in March of 2009, and it suggested that the sentiment on the Street was so poor then that buying opportunities existed.
After comparing normalized demand levels to actual demand for investments at that time we observed discrepancies as well, and undershoot again, and that offered additional confirmation. My proprietary work identifies where natural rates of demand are for investments in the U.S. economy, and when we compare actual demand to normalized demand we can also see clear periods of overshoots and undershoots (click here).
Not unlike the consumer based overshoots that we are witness to now, demand and even equity based valuation ratios seem to be overshooting as well, but that is a conversation for another day. Today's topic is the consumer, and the high end of the market certainly seems more sanguine than I have seen them since the middle of 2007, right before the most recent market meltdown.
Although the low end of the market does not share that enthusiasm, and that divergence raises a host of additional concerns, the basis for projections using our "Random Walk" model is contrarian as it identifies overreactions, either positive or negative, and attempts to identify opportunity afterwards. This is part of a group of indicators, and although I expect that someday this will hiccup, this part of our analysis has never been wrong.
Using an only partly scientific approach, which is mostly hands on, I have determined that shortly after the market peaked about a month ago the sentiment on the street also seems to be peaking. This slight lag is normal, it even happened in 2009 where sentiment actually bottomed in the middle of 2009, shortly after the March 2009 low.
Interestingly, though, the high end is not as ready to make the big purchases as their face-value sentiment may actually suggest. They are paying up for the basics -- movie tickets, dry cleaning, specialty retail and food -- but they are not stepping up to the extravagant purchases, nor are they likely to do so.
For example, Tiffany's (TIF) revenue last quarter grew by a meager 1.6%, but Whole Foods Market (WFM) increased revenue by 13.6% by targeting the same customer. That high-end customer is also buying expensively priced retail merchandise from Lululemon (LULU) at an extremely rapid pace.
My point here is that the high-end is very happy, very willing to buy the higher-end goods and services, and the price points for those items is actually increasing. But when the limits are pushed to the ultra high end like TIF we have seen enough hesitation for us to believe that a shift in absolute sentiment is also already occurring.
I expect the trickle down impact of consumer sentiment to start to impact even the higher end food and specialty retailers soon, but I do not expect much change on the low end. Those consumers have not seen a spike in sentiment at all, they are still struggling, and this tale of two worlds will not change their pace of participation very much in my opinion.
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