Economists have historically done a bad job at predicting recessions. But they usually don't lack conviction. Right now, not many are sure what comes next for the economy. There is ample data to support any opinion. That's why it's interesting that shares of companies that cater to wealthy consumers like LVMH Moët Hennessy (LVMHF -0.44%), Hermes (HESA.F -0.35%), and Ferrari (RACE 0.06%) are back at all-time highs.
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Although Ferrari is a household name, many may be unfamiliar with the iconic Birkin or Kelly bags of Hermes. Most are between $10,000 and $100,000. And even if you are willing to spend that, you can't just walk into a store and grab it off the shelf. They have waiting lists of months to years, and many customers begin their collection having to buy one at auction. The products of LVMH Moët Hennessy Louis Vuitton (LVMH for short) are more accessible. It recently became the first European company to reach a $500 billion market capitalization and its CEO is the world's richest man. Aside from the namesake brands, it houses dozens of others including iconic names like De Beers and Tiffany, Dom Perignon, and Christian Dior.
Those don't seem like the the types of companies Wall Street would covet when headlines point to inflation, recession, and bank failures. Let's take a look at the data to get a better idea of what investors might be thinking.
Are consumers finally tapped out?
As early as last summer -- after two consecutive quarters of negative growth in the Gross Domestic Product (GDP) -- many suspected the U.S was already in a recession. That was premature. Growth resumed, and although the National Retail Foundation reported that holiday spending fell short of forecasts, it still grew at more than 5% over the previous year. Consumers have continued to spend. And it keeps surprising economists.
Inflation has undoubtedly boosted some of the numbers. And there are signs that the much-anticipated slowdown is finally arriving. April's report from the Bureau of Economic Analysis (BEA) showed consumer spending in March was flat compared with the previous month. That's a deceleration from 0.1% in February and a scorching 2% in January. Not all expenses are created equal. In that report, a decline in spending on goods was offset by a continued rise in spending on services. That's been a theme for months. One area the market clearly isn't worried about is the luxury segment.
A bigger bubble?
The S&P 500 index was peaking to start 2022. Many think historians will look back at that time as the bursting of a stock market bubble. It was an economy fueled by low interest rates and COVID-related stimulus -- things that won't be repeated anytime soon. Valuations of luxury goods makers like Hermes, Ferrari, and LVMH were benefiting from the boom. At least that's the story.
But after collapsing in the first half of 2022, the valuations of those companies have stormed back even higher than when the market was peaking. Stimulus is long gone. And the Federal Reserve has rapidly jacked interest rates to levels last seen in the mid-2000s. If the conditions that supposedly spurred the bubble are gone, how can these companies be back at all-time highs and lofty valuation? There are at least two reasonable explanations.
LVMHF PS Ratio data by YCharts
Landing an economy
The first explanation is that investors believe a potential recession will be mild -- what Fed watchers call a "soft landing". In that scenario, an economic downturn would have little impact on the demand for luxury goods. Those with the money to buy a $30,000 handbag or a $400,000 car, or to regularly drink $300 bottles of champagne, might not even realize the economy has slowed. It's a bold bet. But it's possible. After all, one of the things that sets luxury brands apart is the perception of timelessness. An enduring quality that ignores fickle trends and economic ups and downs. Those buying shares may be counting on the fact that these companies -- and their customers -- think in terms of decades, not years.
The other possibility is that despite so many headlines and prognostications, Wall Street simply doesn't believe a recession is on the horizon. The April jobs report showed many more jobs created than expected -- three times as many as we need to match the expanding working-age population. The unemployment rate is at a 53-year low. Inflation -- the bogeyman of 2022 -- has come crashing back down. And although there are still pockets of stubbornly high prices, the trend is clear. The return of the luxury goods makers to premium valuations may be an indication that Wall Street views the recession worries of 2022 as just a scare. Not the real thing. Following this line of thinking, the stock market could be heading back to a new all-time high soon.
Does that make it time to buy?
One of my favorite Warren Buffett quotes is that there are no called strikes in investing. For those unfamiliar with baseball terms, it means you don't have to make a decision on any particular stock. For now, that seems like the best route for LVMH, Hermes, and Ferrari. Inflation is coming down, but some important sectors like services seem stuck at an uncomfortably high level. The job market remains robust, but if you use a moving average to reduce the month-to-month noise a downward trend is obvious. Headlines have been filled with large regional banks failing and concerns about the industry as a whole. Historically, that's the beginning of a problem -- not the end of one. In perhaps the best illustration over the confusing economic data, economists on staff at the Federal Reserve are predicting recession later this year. Jerome Powell, the Federal Reserve chairman, disagrees.
Weighing it all together, I can't say we are headed into a recession. But the likelihood keeps me from buying LVMH, Ferrari, and Hermes at valuations that many would consider unprecedented.
