Many of the problems that led to the recent financial crisis in our economy were reflective of the problems that consumers themselves face on a smaller scale -- heavy debt levels and inadequate savings.
However, after the recent financial shake-up, evidence is mounting that Americans may have learned their lesson at last -- and it's a lesson that could have lasting implications for all investors.
The other "New Normal"
According to a recent study by Allianz Group Economic Research, consumers are stepping up their saving, perhaps permanently. The study predicts that in the wake of the financial crisis, national savings rates could rise as high as 6%-6.5% and stay there. This would translate into roughly $700 billion saved every year over the next decade.
Given that consumer spending accounts for roughly two-third of gross domestic product, if this higher savings rate does turn out to be a long-term trend, it will mark a meaningful departure from recent decades. That extra $700 billion that will flow into money market funds or retirement accounts each year means $700 billion less buying goods and services in our economy. That could have a profound effect on what kinds of investments will thrive in the near future.
Trading steak for hamburger
One of the biggest changes we'll likely see in a more thrifty environment is a cutback on conspicuous consumption. The retail sector has already been slammed, with dozens of firms like Circuit City and Linens N' Things declaring bankruptcy, and even stalwarts like Macy's (NYSE: M) cutting thousands of jobs.
An extended period of frugality means that luxury goods companies such as Louis Vuitton, Gucci, and Tiffany & Co. (NYSE: TIF) could face further pressure from suddenly cost-conscious consumers. At best, this corner of the market will only see tepid growth this year, so investors might want to think about sitting out luxury goods stocks for the near future.
Of course, when investors bypass higher-end retailers and producers, someone else benefits -- low-cost mass producers. That means players like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) could be some of the biggest beneficiaries of a cautiously rebounding economy. In fact, Target just reported fourth-quarter profit growth of 54%, topping Wall Street expectations. Likewise, Wal-Mart saw its Q4 profit rise 22%, despite a 0.5% decline in sales during that time.
Consumer staples are another area that should hold up well in a high-savings environment, since people still tend to buy the basics, even when they're cutting back. Investors might want to take a look at names like Proctor & Gamble (NYSE: PG), who recently announced an initiative to launch a slew of new products designed to boost revenue by attracting recession-battered consumers.
You can boost your returns from defensive plays like these by making sure you're in dividend-paying stocks. Names like McDonald's (NYSE: MCD) and Johnson & Johnson (NYSE: JNJ) both offer dividend yields in excess of 3% and trade at fairly reasonable valuations. Or, if you want a big shot of dividend-producers all at once, consider a dividend-focused exchange-traded fund like Vanguard Dividend Appreciation ETF (VIG).
If you want to learn more about how to increase your own personal savings or what investments are right for you in this challenging environment, think about checking out the Fool's Rule Your Retirement investment service. With your free 30-day trial, you'll get access to first-rate personal financial planning advice, as well as the lowdown on the very best mutual fund investments for your long-term goals. It's a brave new world out there, and the team at Rule Your Retirement is dedicated to making sure you stay on track along your investing journey!
Editor's Note: A previous version of this article incorrectly stated that Ann Taylor declared bankruptcy. The Fool regrets the error.
Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement newsletter. At the time of publication, she did not own any of the companies mentioned herein. Wal-Mart is a Motley Fool Inside Value selection. Procter & Gamble and Johnson & Johnson are Income Investor selections. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Procter & Gamble. Click here to find out more about the Fool's disclosure policy.
