Before today, I just assumed that retail companies would be the biggest beneficiaries of the recent strength in U.S. consumer credit growth. I was wrong – industrial stocks get the larger profit boost.
U.S. economic data as a whole has been mixed but consumer credit growth has been exceptionally strong in recent months. The six-month moving average for consumer borrowing stands at $26-billion (U.S.) per month, almost double the level of a year ago.
Using 10 years of history, I compared consumer credit growth to the performance of the 10 major market sectors of the S&P 500. The S&P 500 Consumer Discretionary index did rise and fall with credit levels, but the relationship was nowhere near as strong as the historic connection between credit and industrial stocks.
Looking at each stock in the industrials index uncovers that United Parcel Service Inc. and industrial equipment provider Ingersoll-Rand PLC have the highest correlation to changes in consumer credit growth.
SOURCE: Scott Barlow/Bloomberg
UPS benefits from the higher levels of economic activity associated with consumer spending – particularly when consumers shop online. Ingersoll-Rand's largest business division is heating and air conditioning, so it benefits from residential construction, both single family and multi-unit, and commercial expansion.
Unlike Canadian households, the low debt levels for U.S. consumers suggests that credit expansion has a lot of room to run. Canadian investors looking to benefit from the trend should look beyond the obvious shopping mall-related stocks and look to industrials.
Follow Scott Barlow on Twitter @SBarlow_ROB.