Over the past few years, I have come to defense of the U.S. consumer more times than I can count. By now, we have all heard the litany of negative arguments from the Bears: the U.S. consumer is strapped; workers are dropping out of the labor force like flies; and real income continues to decline.
All the while, though, consumer stocks were acting very well, painting a much more bullish picture than the Bears would have you believe. If the consumer spending was really slowing down, I would counter, why are the consumer stocks leading the bull market higher?
That all changed, though, at the start of this year. The Consumer Discretionary sector (XLY), most sensitive to changes in the economy, has moved sharply lower on a relative basis against the S&P 500 (SPY).
In the chart below, you’ll notice that we last saw similar weakness in 2012 during a 10% correction for the broad market. You’ll also notice that Consumer Discretionary weakness was seen in early 2000 and 2007, well before the cyclical tops were made in March and October of those years.
Now, of course, this weakness could very well be temporary but for now I believe it is prudent to exercise caution here, especially with the equity indices still hovering near all-time highs. Also, if the weakness were stemming from one industry in particular, I could explain it away as an outlier. But that is simply not the case. We are seeing weakness in each of the five sub-industry groups within the Consumer Discretionary sector: