Global Allocation Insight

3 reasons to believe in the consumer

October 16, 2020

Despite the worst economic and health crisis in generations, U.S. consumers are defying the pessimists.

Online commerce continues to surge while the pickup in consumer spending has broadened to include more traditional categories, notably autos and housing. As spending has rebounded so have consumer stocks. Third-quarter gains in the global consumer discretionary sector have been led by internet commerce companies, but other industries have also rallied, most notably home improvement, general merchandise retailers and home builders.

While the fading possibility of additional fiscal stimulus is a risk to future consumer stock gains, we see three factors that could offset this risk and support future growth:

  1. Lower household debt. Household debt as a percentage of disposable income remains at a 20-year low while debt servicing costs have never been lower. Meanwhile, net worth is supported by both a rising stock market and a housing rebound.
  2. Snapback in jobs. The unemployment rate fell from a peak of 14.7% in June to 7.9% in September. While we believe that the labor market is going to heal slowly from here, the snapback in the last 3 months has been very strong.
  3. Housing surge. Record low mortgage rates and a renewed interest in home ownership and suburbia has fueled a recent surge in housing. The below chart illustrates the sharp increase in pending home sales.

A sharp increase in U.S. home sales suggests consumer strength
Pending Home Sales Index

Chart: Pending Home Sales Index

 

Source: Refinitiv Datastream, National Association of Realtors. The Pending Home Sales Index (PHS), a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. An index of 100 is equal to the average level of contract activity during 2001. Activity in 2001 is fairly close to the higher level of home sales expected in the coming decade relative to the norms experienced in the mid-1990s. As such, an index of 100 coincides with a historically high level of home sales activity.

While we anticipate that the market will be more volatile and likely range-bound going into the U.S. election, we believe consumer strength, coupled with a resilient corporate sector and stimulus will support risk assets into 2021.

The BlackRock Global Allocation Fund holds an overweight to the consumer discretionary sector. We favor internet commerce companies, which we believe will continue to take wallet share. We also maintain exposure to housing-related and homebuilders positioned to benefit from the housing market rebound and consumers’ increased appreciation for home improvement projects. Our positioning within consumer discretionary has been a primary contributor to the fund’s outperformance versus its reference benchmark year-to-date.

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Rick Rieder
Rick Rieder
Chief Investment Officer of Global Fixed Income and Head of the Global Allocation Team
Russ Koesterich, CFA, JD
Russ Koesterich, CFA, JD
Portfolio Manager,
BlackRock Global Allocation Team
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team.   Mr. Koesterich's service with the firm dates back to 2005, ...
David Clayton, CFA, JD
David Clayton, CFA, JD
Portfolio Manager,
BlackRock Global Allocation Team
David Clayton, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team.   Mr. Clayton joined the BlackRock Global Allocation team in ...
Kate Moore
Kate Moore
Head of Thematic Strategy,
BlackRock Global Allocation Team
Kate Moore, Managing Director, is a member of the Global Allocation investment team and Head of Thematic Strategy. Her investment mandate includes identifying ...

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