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Why This Downturn Is Different

By Alex Dumortier, CFA - Updated Apr 5, 2017 at 8:03PM

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Two sectors at risk and one that could profit.

On Wednesday, Ken Chenault said that high-income earners were pulling back on their spending -- in contrast to previous periods of economic downturn. He should know: As the CEO of upscale payment card issuer American Express (NYSE:AXP), he's got a prime perch from which to observe the spending habits of mass affluent consumers.

That spells bad news for AmEx and its competitors Visa (NYSE:V) and MasterCard (NYSE:MA), but it also highlights two other sectors that could be particularly vulnerable to this downturn: luxury brands such as Tiffany (NYSE:TIF) and Ralph Lauren and high-end retailers like Nordstrom and Saks.

Last month, at the 2008 Luxury Briefing Conference, Claire Kent -- a former Head of Luxury Research at Morgan Stanley -- said the "bursting of the 'It' bag bubble" was imminent. She also singled out brands whose strategy relies on customers "trading up" as being particularly vulnerable. That's two strikes against handbag and accessories maker Coach (NYSE:COH), for example.

Bad for chic, good for cheap
For investors, it's not all bad news, though. When consumers are forced to trade down instead of up, that can create opportunity for a different set of companies. Target's (NYSE:TGT) "cheap and chic" positioning -- not to mention Wal-Mart's (NYSE:WMT) "just plain cheap" approach to retail -- look a lot better suited to this environment than Coach's "masstige" strategy.

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Fool contributor Alex Dumortier, CFA has a beneficial interest in Coach, but not in any of the other companies mentioned in this article. Wal-Mart Stores and American Express Company are Motley Fool Inside Value recommendations. Coach is a Motley Fool Stock Advisor selection. The Fool owns shares of American Express Company. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$129.82 (0.96%) $1.24
Target Corporation Stock Quote
Target Corporation
$169.60 (-0.04%) $0.07
American Express Company Stock Quote
American Express Company
$162.99 (0.34%) $0.55
Visa Inc. Stock Quote
Visa Inc.
$211.08 (-0.30%) $0.65
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$350.58 (-0.79%) $-2.80
Tiffany & Co. Stock Quote
Tiffany & Co.
Tapestry, Inc. Stock Quote
Tapestry, Inc.
$35.50 (3.08%) $1.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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