Discretionary Stocks Point Towards Weaker Economy

September 6, 2023No Comments

Hello and welcome once again to the Smart Money Dumb Money Show. And I’m your host as usual, Keith Richards. But today it’s not as usual as in, I am not recording this in my office or my home. I am recording this at my cottage. Now, this is the second time I’ve done this and it’s kind of fun. Now, the reason I decided to record this at the cottage is because the topic I want to talk about today kind of ties into what my wife and I have observed about the cottage this year. And that is, the lake, which you can see behind me. So there’s my dock and there’s the lake. And you can kind of tell probably by the video that it’s a pretty nice day here at the cottage, but there’s no boats. And this has to do with today’s topic, which is discretionary type of companies.

So discretionary, consumer discretionary stocks, and those type of stocks and those type of companies tend to soften and their earnings retreat a bit as we get nearer to recession. Now remember, we are in a high inflationary environment. Now we know that inflation, as far as CPI is concerned, has come down from around 8%, and it’s supposedly only around 4% right now. But we also know that core inflation, which is the stuff we really worry about, such as your groceries and your gas, are not retreating at all. So, what that means is that if you’re spending all of your money on your gas and your groceries and other such essentials, you don’t have a lot of money left over for toys. And who this affects is really the middle class. We know that people who are financially constrained as in low-income people, they’re struggling enough with the groceries and the gas to begin with.

And with this new pressure, they’re certainly not even going to think about discretionary purchases such as buying a boat or a motorcycle or a new couch. However, the middle class often does do most of the spending in those consumer discretionary purchases. And by the way, if you hear sort of noises in the background, part of it is because my dog, you can kind of see here, is chewing on a bone. So you’ll hear him chew on his bone. So anyways, I want to talk about some stocks and the signs that consumer discretionary spending for the middle class is retreating.

And I’m going to start off with a chart, which through the magic of post-video editing, we can insert these charts even though my cottage. So I’m going to start off the chart of the Baltic Dry index. Now, this is an index that really shows us the cost of shipping and then that cost reflects in volume. So supply/demand, when there’s less shipping, the fees that the shipping companies are making goes down. So they’re shipping less dry goods, and a lot of those dry goods are discretionary items. So that chart, as you will see, has been on a bit of a downward trajectory, really since 2022. But I want to talk about some of these specific sectors that are really hitting home in the past six to eight months. So I’m going to get into probably the big one, which again applies to my cottage here, which is boats.

Now I can’t think of an expenditure that’s more of an, ‘I have excess money and I just want to buy a toy’, kind of purchase than a boat because a car is, for example, not a discretionary purchase. You really do need a car unless you live like Christina Freeland in the city and never drive a car unless it’s 140 kilometers an hour. But whatever, you don’t buy a boat for anything else other than pleasure. And when you’re struggling with gas and you’re struggling with purchasing groceries, you’re not going to buy a gas-guzzling, extra expenditure like a boat. So I want to look at some of the companies that manufacture boats and pardon my looking down, I have my list here and I want to start off with the king of them, which is Brunswick Boats. And they’re kind of a big producer in that area and they missed on their earnings recently.

And you can see that on the chart. Look at the gap down and the big bar. Mastercraft, the same thing. You’ll see that this is another boating company, a boat manufacturer, and they’re suffering right now very recently, again, another meltdown. Malibu boats – so that’s another example of this. And finally, One Water Marine. So these are four boat manufacturing companies. And hey, there’s a boat, I dunno if you can see it. There’s a boat going by my cottage, maybe you can hear it, but it’s a little boat. So it’s not really in the high expenditure. And these probably people probably have owned this boat for a while. My wife and I have noticed a massive lack of boats on our cottage, this lake this year, and it’s been extremely noticeable. And that could be because gas, but I think also because less people are traveling up to the cottage, less people want to put their boat in the water and less people are buying boats.

And that’s obviously seen through the earnings and the charts that we just looked at. So let’s talk about one other well-known discretionary purchase that people will make, which is motorcycles. And I want to refer to the king of the ball, which is Harley Davidson. Now, this is again a middle-class, middle-aged, what do they call it? The middle-aged crisis. People run out and get a boat or a Harley or whatever, something they’ve always wanted by the time they finally start making a decent amount of money and they can afford one thing and maybe a $40 or $50,000 motorcycle or a $50 or $60 or $70,000 boat. Not necessarily a yacht, but a boat of some sort that’s comfortable. And these guys, as you can see on the boats, were not doing well. Well, look at Harley Davidson, same thing. Their sales are obviously suffering. The stock is suffering.

So, this is again – these are leading indicators as to what might suggest is a softening economy. Now, I’ll show you as well, Fossil, which is kind of, they do those fancy watches and stuff, but again, they tend to sell to more like the middle class. They don’t sell to lower income, but they also do not sell to the upper-income echelon. That tends to be more of Louis Vuitton and Gucci in that area. So Fossil is kind of a middle-class discretionary purchase that you don’t need, and their stock has not been doing well in this environment, probably reflecting poor earnings outlook. So those are sort of examples of what are the middle class – who tend to do the most of the spending of the discretionary purchasing – that matters from a company earnings point of view. What are they doing? Well, they’re cutting back a bit.

Okay, so now let’s look at a couple of stocks. I’m really going to just focus on one in particular, which is Ferrari. And I mentioned this, in fact, I did a blog a while ago and it was called, I’m actually going to, it was called ‘Luxury Stocks’. And, what I was trying to illustrate is this exact thing that I’m noticing right now, which is luxury stocks like Ferrari and Louis Vuitton are doing okay. Louis Vuitton is trading sideways, and maybe I will put a chart of Louis Vuitton on this video. And of course, Ferrari is doing just fine. They’ve been in an uptrend for quite a while because the upper, upper echelon, you really can’t compare Ferrari to say a BMW or Mercedes because you can walk into a BMW dealer and easily get a car under a hundred. And even their upper-end range is usually like the $100 to $150,000 area for their very top-range stuff.

Same with Mercedes. Even a lot of Porsche though, Porsche has the GT lines that can get into $300 and $400,000, but these are still expenditures. Mercedes, BMW, Audi, that middle-class people buy because they want the sticker on the hood, so to speak, to look like they’re driving a prestige car, but they don’t have the money to spend $300, $400, $500,000 on a car. Whereas Ferrari customers to walk in the door, you’re spending around $400,000. So you’re really looking at a very upper-echelon. And in a recession, the upper echelon tends not to experience the same pain as mid-class, middle-class expenditure-expending people. That’s why we’re seeing the Ferrari chart, the Louis Vuitton chart staying relatively flat when you compare it to these other expenditure-orientated consumer-discretionary type of stocks. So I guess the message I’m trying to impart with my dog, chewing the bone in the background here and probably making a lot of noise that you hear in the background, that what I am trying to impart is that there are signs in stocks that we can see are suggesting a slowdown in the economy is already happening.

And therefore, I think this adds to my argument that with unions pushing wages up, with money printing that we’re stuck with because the Government of Canada and US expended a lot of money on, in many cases rather non-GDP-orientated expenditures. So we’ve got a lot of money supply in the system. We have wages going up, a tight labor market, we’ve got immigration, which creates more demand, and now we have, on the other hand, a lot of the discretionary companies are showing signs of retreating because less expenditures in that area. And that means there’s going to be some layoffs probably at some of these companies I just mentioned, the boat manufacturers, perhaps some of the Harley Davidson-type of companies, any of the middle-class orientated, consumer-discretionary, luxury-type items. So these employ people and it’s also a sign of what’s happening out there.

So, I think this is just another piece of evidence to my recent blogs where I have noted that ‘stagflation’ is a real possibility. That is that core inflation stays high, but you get a softening of the economy in some areas and that can cause a inflation yet not-so-wonderfully growth-orientated economy. And that typically hurts markets and ultimately keeps rates high. And that means that over time, I think one of the sectors that I’m going to stick with is the commodities and hard assets area. So, just another piece of evidence, despite the lack of boats on the lake, in fact, perhaps because of the lack of boats on the lake, it’s still wonderful being at the cottage. And I’d encourage you to spend that extra 20 bucks. And if you have access to a cottage, still make the drive up to your cottage or to your friend’s cottage and enjoy a nice weekend because the summer’s growing very short. I’m recording this I think on the very last day of August. So you get out there while you can, but don’t bring a boat. Thanks for watching and we’ll see you in a week. By the way, don’t forget, I’m at the Money Show Saturday, September 9th. I’m showing a presentation on how to structure a portfolio for good markets and bad. I do hope to meet some of you. It’ll be at 3:00 at the Metro Toronto Convention Center in Toronto. Have a great week.


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