Personal spending ticked up in the government's latest round of data collection. At a glance, it's an intriguing development, particularly because it comes at a time when incomes are more or less stagnant and the rate of personal savings is stubbornly high by historical standards.
Why "stubbornly"? Well, with the economy powered to the tune of 70% by consumer spending, our increased interest in savings -- while admirable on an individual basis -- reflects what economist John Maynard Keynes called "the paradox of thrift": What's good for ye ain't necessarily so good for me.
That's especially true these days, given that the government's economic stimulus spending will come to an end in just a few months' time, while banks remain reluctant to lend. Against that backdrop, it's difficult to foresee a sustained recovery if consumers don't step up. And it's difficult, too, to foresee a meaningful increase in personal spending if personal incomes don't also rise.
Bottom line: Even the most fundamentally focused of investors should keep their eyes on the trajectories of personal spending and income.
As goes the consumer, so go the likes of Tiffany (NYSE:TIF), Abercrombie & Fitch (NYSE:ANF), and Nordstrom (NYSE:JWN). These pricey retailers are especially sensitive to the ebb and flow of discretionary income and consumer spending patterns, it's true. But they're canaries in the economic coal mine as well. Broadly speaking, every company is cyclical -- it's the degree of cyclicality that can separate winners from losers during tough economic times.
Cases in point
In a rough 2008, for example, the Consumer Staples Select Sector SPDR (XLP) trounced the broad stock market by 21 percentage points. Which makes sense: The ETF's portfolio is chock-full of companies like Procter & Gamble (NYSE:PG) and Wal-Mart (NYSE:WMT). The former manufactures products we require; the latter sells 'em dirt cheap.
It's different for the holdings of the Consumer Discretionary Select Sector SPDR (XLY), which include the I-can-live-without likes of Disney (NYSE:DIS) and Starbucks (NASDAQ:SBUX). That ETF lost 33% in 2008.
As you'd expect, 2009 saw a reversal of fortunes for those two sector trackers, a point worth bearing in mind as you build and maintain your portfolio. Even if the data seem to suggest a more defensive tack right now, savvy types should tilt in that direction, not fall headlong into it.
A smart approach is to mix up your lineup via high-quality concerns of all stripes but with one thing in common: blue-light special prices.
The Foolish bottom line
The rally since March has hit a rocky road of late, but that seemingly bad news is actually good news from the point of view of long-term investors. Bargains are now a bit more plentiful, and the Fool's Inside Value newsletter exists to help you find 'em -- wherever they reside -- without muss or fuss. The service's scorecard features plenty of buttoned-down overachievers trading for a song, and yet a deeply cyclical, growth-oriented pick resides among the service's five Core holdings, too.
The through line: Deep discounts to intrinsic value, which the IV team calculates for you. If you're inclined, you can even sort the service's complete set of recommendations according to their "margins of safety," a feature that instantly displays those recommendations trading with the biggest markdowns to their worth.
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Shannon Zimmerman runs point on the Fool's Duke Street and Ready-Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast 'n' furious radio show. Shannon owns shares of Disney. Disney and Wal-Mart are Inside Value recommendations. Disney and Starbucks are Stock Advisor picks. Procter & Gamble is an Income Investor selection. The Motley Fool owns shares of Procter & Gamble and a bear put spread on Abercrombie. You can check out the Fool's strict disclosure policy right here.
