The Cautious Consumer is Hitting Their Breaking Point

“I won’t do this anymore” Renee announced as she walked into our regular Thursday lunch meeting “I just spent $30 on soup, salad, and iced tea. It’s getting ridiculous!”

How we eat, travel, and dress changes when we have disposable income. As we’ve seen one record stimulus after another over 4 years, Americans have been flush with cash and willing to spend. Consumer discretionary companies have largely been the beneficiaries of this extra money, (think: cruise lines, restaurants, and athleisure brands).

More money and more demand pushed prices up, leading to inflation. Today, many prices are 20-30% higher than in 2020.

Inflation can be a problem for consumer discretionary companies: when excess money dries up, consumers refocus on the essentials. Simple as that.

It appears that’s the case halfway through 2024:

Food supply giant Sysco echoed Renee’s sentiment during a recent earnings call:

"Consumer confidence has been impacted. Our belief is that it's inflation-based, it's menu price based. You can see it across the portfolio of customers that we serve… Quick Service Restaurants have been hit the hardest” CEO Kevin Hourican

When economic times tighten, consumers (and markets) wisely return money to their staples (think: groceries, discount retailers, and hygiene products). Unsurprisingly, that shift has already begun in the stock market:

*Sector Price change without dividends reinvested*

While staples have outperformed discretionary, the best-performing sector YTD is actually “boring old” Utilities, gaining nearly 15%. I guess people are still paying their bills.

A cautious American consumer may be the beginning of a longer-term trend for markets. That’s probably partly why Vanguard projects value stocks to outperform growth 3-fold over the coming decade.

As for our Thursday lunches, we still get takeout from time to time as we catch up on clients, markets, and business matters. But recently Renee got us all these nice bowls so we can make our own soup or salad without breaking the bank: