U.S. equity markets have had an extraordinarily good run this year, and one sector has really stood out: consumer discretionary stocks.
All five industry groups within that sector -- automobiles, durables and apparel, media, retailing and consumer services -- have outpaced the overall performance of the S&P 500.
There's good reason, says RBC Dominion Securities chief U.S. market strategist Jonathon Golub, who expects the outperformance to continue over the next two years.
"While investors might be quick to attribute this to some shift in investor sentiment toward consumer stocks, sales and earnings growth were the real drivers behind these returns," he wrote in a research note.
Sales in consumer discretionary stocks grew by 36.5 per cent between 2008 and 2013, while sales for the S&P 500 overall grew by only 23 per cent. Earnings grew 114.7 per cent, well ahead of earnings growth of S&P 500 stocks of 65.3 per cent.
Mr. Golub sees no break in this trend: Sales are expected to grow by 6.6 per cent in 2014 and 6.3 per cent in 2015, outpacing gains in the S&P of only 4.3 and 4.4 per cent, respectively.
He sees earnings growing 17.8 per cent in 2014 and by another 17.3 per cent in 2015, compared with projected profit growth of 10.7 per cent and 10.5 per cent, respectively, in the S&P 500 earnings growth rate.
Below are the four underlying themes that Mr. Golub says have fuelled the success of discretionary goods - and are key to their future performance.
1. Durables are supported by macro tailwinds
Mr. Golub gives two reasons why housing and auto stocks have boomed and will continue to boom: The introduction of quantitative easing has brought about incredibly low mortgage financing rates, and second, sales are coming off a very low base.
The number of American new home sales will rise to about 400,000 in 2013, but it's still a far cry from its peak of around 1.4 million new homes in the years leading up to 2008.
"Despite a large relative increase from depressed levels, housing activity remains quite anemic in an historical context. With inventories of unsold homes quite lean, the recent upward trend should continue for quite some time," he said.
He said that although auto sales are nearing pre-crisis levels, the recovery still hasn't accounted for the sales that were put on hold because of the collapse, which he expects will result in a faster trajectory growth in the future.
2. The changing shopping habits of high-end consumers
As detailed in The Globe's Wealth Paradox series examining the effects of growing income inequality on Canadians, the divide between the rich and poor has increased since the economic collapse.
It's even more acute in the U.S.: 20 per cent of Americans bring home half of all income, the RBC report notes. That has translated into strong demand for luxury goods that has seen the S&P Global Luxury Index vastly outpace the S&P 500.
But discount chains like TJX have also benefited from a new frugal mindset among the rich brought about by the downturn.
"Customers who normally shop the higher-end department stores have been more willing to shop the TJX concepts because they will often find the same brand names at prices that are 20–60 per cent lower," said RBC analyst Howard Tubin in the same report. "Customer traffic, same-store sales, and profits have all increased since the Great Recession at TJX, as more and more shoppers have become price-sensitive when purchasing apparel and home fashions."
3. A changing landscape for media and online
Higher demand for media offerings and a growing inclination towards online shopping has been very good to some companies.
The way the public consumes media is increasingly turning to digital and mobile, sending demand for wireless connectivity and high-quality content sky-high. Cable subscription rates have also doubled in the past eight years, according to the report, which suggests increasing demand for programming.
As for online shopping, "while at some point the penetration of online retailing will reach saturation, there are no signs that we are approaching this any time soon," Mr. Dolub writes, estimating that online sales will account for around 14 per cent of total retail in 2014, up from an estimated 11 per cent in 2012.
4. Brick and mortar retailers have been under pressure
Traditional businesses such as restaurants, apparel and retailers have historically moved along with economic activity. The fact that the economy is indeed on an upwards trajectory suggests that shares for traditional businesses will continue to rise with it, with retail earnings, having grown 51.7 per cent between 2008 and 2013, expected to grow 23.1 per cent in 2014 and 18.6 per cent in 2015, he said.
Retailers and businesses have also done relatively well in adapting to consumers by offering discounts and services that widen their appeal, suggests Mr. Golub.
"Bottom-line, a weak economy, coupled with many of the forces driving success in durables, media, high-end, and online, makes the operating environment more challenging for traditional consumer areas. Those that adjust their business models are far more likely to succeed," he writes.