Retail sales and consumerism make up a staggering 60-70% of America’s Gross Domestic Product (GDP), so it’s no wonder why many investors have been historically bullish on consumer stocks. In recent years, that bullishness has been taken to new heights as income seekers have been drawn to consumers stock’s’ stable cash flows, demand and big dividends.
The Consumer Staples Select Sector SPDR (XLP), which bets on those firms selling items like toilet paper, laundry soap and food, is up more than 76%, over the last five years. Its rival, the Consumer Discretionary SPDR (XLY), has gained more than 121% over the same time.
Given that consumerism – and the stocks that represent the sector are so popular and up so dramatically – anything that could either give them a boost or hinder their performance shouldn’t be taking lightly. And we have a big ‘anything’ potentially hitting them in this November.
We’re talking about the impact of the upcoming Presidential election.
While both Hillary Clinton and Donald Trump haven’t actually spelled out a “consumer plan,” their various tax, wage and earnings proposals will have a direct effect on consumer activity and the stocks within the sector. For Trump, those policies will create a different set of winners and losers.
The Classic Republican Play
While Donald Trump has changed some of the details of his consumer and tax plans a few times, the general gist of them is the same. Taking his cues from Reaganomics, Trump’s plans include a hefty dose of across-the-board tax cuts that, in theory, should trickle down to businesses, wages and overall consumer health. The biggest tax cuts would come to those at the top of the ladder. However, tax deductions for the middle class would also be implemented.
Under Trump’s proposed tax cuts, consumer staples stocks – those that provide the basic necessities – could remain neutral. Trump’s original proposal called for tax brackets of 0%, 10%, 20% and 25%, but he has since changed that stance after economists estimated that it would balloon the federal deficit. His plan now has just three brackets, with top earners capped at 33%. When looking at it today, those are slight gains for middle-class Americans and not very much help for those in the bottom tiers. As a result, consumer staples stocks like Kimberly-Clark (KMB ) or Procter & Gamble (PG ) may not see any real additional demand for products.
Consumer Discetionary Stocks
While staples may not see any real boost, discretionary providers could see a jump in their revenues. As we said, the top tax rate would fall to 33%, which is down from the current rate of 39.6%. The hope is that the difference in taxes goes towards building jobs and new industries, but studies have shown that tax breaks for the rich tend to be spent on discretionary items or invested in securities.
With that in mind, stocks such as high-end retailer Nordstrom’s (JWN ) could surge. The luxury department store has suffered in recent months, as the rich have clamped down on spending. With Trump’s policies in place, they would have extra cash to blow on $600 pairs of shoes or $10,000 watches. They’ll also have more money for those Ferrari’s (RACE ) or other luxury goods from LVMH Moet Hennessy Louis Vuitton (LVMUY).
Trump’s plan could also benefit retailers like Amazon.com (AMZN ) and Starbucks (SBUX ). Amazon could see more revenue from additional sales, while Starbucks could see the rich trading up to higher ticket and food items.
Retailers & Restaurants
When it comes to wages, Trump is the polar opposite of his rival Hillary Clinton. Clinton supports raising the federal minimums to $12 or $15 per hour. However, Trump has called those plans “disastrous” and “job killers.” Trump has an unclear stance on the issue and has confused voters in the process; his initial stance was to remove the minimum wage amount completely, but more recently he has stated his desire to raise the minimum wage in the future. Either way, a lower-wage rate than Clinton’s should be a benefit to retailers and restaurants that rely on low wages to help boost margins.
The biggest winner could be mega-retailer Wal-Mart (WMT ). The discount chain has already begun to cut jobs, since several states have already begun to raise the minimum. With Trump’s plan in place, WMT would still be able to keep its thin margins on its sales.
Other big winners would be the fast food industry. McDonald’s (MCD ) and Wendy’s (WEN ) have both fretted over rising wages and the cost to franchises. Trump’s calls to leave wages where they are or to cut them would directly benefit these stocks and their bottom lines.
The Bottom Line
For consumer stocks, Trump’s policies of big-time tax cuts and keeping minimum wages low could be a net benefit. Staples wouldn’t necessarily see a huge boost, but discretionary providers and various retailers could get a nice jump from top earners. In the end, the outcome for the entire sector would be mixed.