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 stocks’ 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 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 Hillary, those policies will create a different set of winners and losers.
Higher Wages & Lower Taxes
Clinton’s policies in taxes and wages stem from several progressive ideals. For starters, Hillary has been a huge proponent of raising the federal minimum wage. Currently that stands at about $7.25 per hour. Clinton has pushed for a $12-per-hour wage, and has urged/supported individual states to do more including raising the minimum wage to $15 per hour for states with high costs of living. In terms of taxes, Hillary has again tapped into the outrage against the richest Americans and their wealth. Her plans include raising taxes on the rich, while providing comprehensive tax breaks for those citizens in the middle and lower classes.
For those purveyors of tooth paste, food items and other “daily necessities,” Clinton’s plans could be substantially beneficial. Economic studies have shown that providing the poorest citizens with extra income directly translates into extra GDP gains. That’s because the people at the bottom of the totem pole tend to spend any extra money they either earn or are given.
A consumer staples firm like Colgate-Palmolive (CL ) would be a direct beneficiary of Clinton’s plans. CL offers plenty of brands among various price tiers, allowing it to profit from consumers making $15 per hour in two ways. One, it’s now a play on a filled shopping basket. Poor consumers won’t have to choose between product x or y, they’ll have money for both. And two, it can profit when consumers trade up their product purchases. Workers only getting a raise of a few dollars are statistically more inclined to trade up to new, more expensive brands.
Consumer Discretionary Stocks
When it comes to the “wants,” Clinton’s policies have a distinct divergence. The heart of her policies have been about America’s neglected middle class – and her tax policy reflects that. While she hasn’t reconfigured the tax brackets, she has proposed numerous tax breaks for America’s middle. This includes breaks for elder care, childcare expenses and out-of-pocket medical costs. Roughly 36% of every $1,000 in tax savings gets spent by middle-class families, and that extra spending tends to go directly into discretionary purchases.
That sort of extra spending could benefit near or aspirational luxury brands like Coach (COH ) or Michael Kors Holdings Ltd (KORS ). These brands offer higher-priced goods that aren’t too expensive for the average American to buy, especially after getting an extra $1,000 to $2,000 in tax savings.
That tax savings will also benefit firms like Disney (DIS ). The House of Mouse’s theme parks and entertainment operations could get a boost as more Americans are willing to take vacations.
However, for those discretionary stocks that focus on the high end, a Clinton presidency could be a major speed bump. Hillary has pushed for significant tax increases for the wealthy, including supporting the so-called Buffett rule – where the rich pay a minimum tax rate of 30%, regardless of earned tax breaks, as well as a “fair share surcharge”. Eliminating various loopholes for top earners has also been a priority.
For stocks like retailer Nordstrom’s (JWN ), high-end automotive firm Ferrari NV (RACE ) and luxury eyewear-maker Luxottica Group (LUX ) could all see slowing sales as Clinton’s proposals take a bite out of extra earnings for the very rich.
Retailers & Restaurants
At first glance, Hillary’s tax and wage policies seem to be a good bet for the actual retailers and restaurants. However, it may turn out to be a mixed bag. Sure, they will get more sales as incomes have risen, but these sorts of businesses rely on cheap labor in order to keep margins high. Having to pay $12 or $15 per hour can and will crimp profit potential, and could lead to cost cutting. Already several retailers have reported lower profits in states that have already enacted $15-per-hour wages. For mega-retailer Wal-Mart (WMT ) or fast food firm Wendy’s (WEN ), a Clinton win could prove problematic.
The Bottom Line
With consumer stocks driving the economy, the presidential election could significantly affect the outcome of the sector. With Clinton’s policies focused on helping the poor and the middle class, consumer stocks should do well under her reign. Higher incomes and tax breaks could trickle down.