Consumer Discretionary Could Get A Boost From Wage Growth

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Includes: DIS, HD, PCLN, XLY
by: David Sims

Summary

Wage Growth is outpacing expectations at 0.3%.

Inflation, measured by PCE, is still tame at 1.4% y-o-y.

Consumer Discretionary might be ready for growth.

Monday morning, investors were treated with personal income and spending data which was expected to rise 0.2%. Personal income rose 0.3%, indicating that wage pressures are finally showing up in the economy.

Click to enlarge

Meanwhile, Core PCE Price data released Monday morning showed that prices rose 0.0%, while the market expected an increase of 0.1%. By that measure, inflation is trending below expectations.

Coming into this report, the 12-month PCE inflation rate was 1.7%. The Federal Reserve's target for inflation is actually 2.0%. So, the current reported data showing at 1.4% y-o-y inflation rate is disappointing.

US 12-Month Trimmed Mean PCE Inflation Rate Chart

US 12-Month Trimmed Mean PCE Inflation Rate data by YCharts

If inflation continues to trend below the 2.0% target, don't expect the Federal Reserve to continue on a rate hike path. They have often stated that 2.0% is an inflation target and not a ceiling. However, this morning's wage growth indicates that we have a mixed picture.

Energy prices are likely a big reason that inflation has not trampled expectations and burst through the 2.0% mark. So, by the end of 2016, we might actually see oil find a bottom and rebound at the same time that wages actually show growth. And at the same time, every person filling their gas tank continues to save money. The long-term result may be that consumption has increased and prices increase. Inflation may be around the corner.

For the past few months, at least, the market has not expected an uptick in inflation. This may be reflected in the 10-year Treasury yield, which has actually declined since the Fed "raised" rates in December, 2015. The yield has dropped to 9-month lows, well off the highs near 2.49% over the summer of 2015.

^TNX Chart

^TNX data by YCharts

Taking Action

It may be time to get out of fixed income securities and get bullish on stocks. Especially consumer discretionary stocks. If people have more money in their pockets from increased wages, and prices remain fairly low, then consumption should increase. An investor without a specific stock in mind might look at the Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY). Top holdings include Home Depot (NYSE:HD), Walt Disney (NYSE:DIS), and Priceline (NASDAQ:PCLN). Stocks like these may benefit if consumers have a little extra spending cash.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.