Investors Not Betting On Tax-Rich Consumers – Bloomberg

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Republicans and President Donald Trump have said that tax reform will be great for the average American consumer. Few professional investors seem to buy it. 

Companies that would benefit from an increase in household wealth and spending are increasingly falling out of favor with professional investors. And the pace picked up as the tax bill moved through Congress, and on to the president. According to a Bank of America survey of investors released on Tuesday, active mutual funds managers were yanking their money from consumer stocks at a faster pace in the past few months than any other sector in the market. Non-index mutual fund managers now have their lowest exposure to discretionary consumer stocks since the middle of 2015. For consumer staple stocks, the exposure is the lowest since 2009.

Less of a Staple

Mutual funds have been lightening up their holdings of basic consumers stocks

Source: Bank of America Merrill Lynch

This seems like an odd time for investors to lose faith.  The unemployment rate at 4.1 percent is the lowest in nearly two decades. There are some signs of distress in credit card and car loans, as well as student debt. But it’s minor compared with the financial crisis. And employers, especially in areas where the jobless rate is below the national average, are finally starting to hand out raises. On top of that, of course, is the tax bill, which Trump promises will boost both pre- and post-tax wages — first as companies use their tax savings to increase salaries, and second from higher take-home pay. 

Given all that, a reticence to invest in such staples as drugstores CVS Health Corp. and Walgreens Boots Alliance Inc. and food manufacturers Tyson Foods Inc. and Campbell Soup Co. can make some sense. Consumer staples  tend to underperform the market during improving economic times. That’s been the case lately, with the average consumer staple stock rising just 10 percent last year, versus 19 percent for the broader S&P 500. Strategist Jim Paulsen of Leuthold Weeden Capital Management in his outlook for 2018 said he would avoid consumer staples stocks, along with telecom and utilities as those sectors tend to do worse than the market when interest rates are rising.

Tax Surplus

Consumer staples companies are expected to be big beneficiaries of lower tax rates

Source: Bank of America Merrill Lynch

Nonetheless, a number of consumer staples stocks, including CVS and Walgreens, are some of the cheapest in the market, trading at 13 and 14 times this year’s earning expectations, respectively. And consumer staples companies are some of the highest tax payers among the S&P 500 companies, so they should benefit from the tax cut. The sector has seen the second-biggest boost, following financials, in analysts’ earnings expectations in the past month, much of that likely driven by the tax plan. But analysts have been upping their sales estimates for the sector as well, suggesting the companies are doing better aside from lower taxes.

Most Unloved

Consumer discretionary stocks owned by the fewest mutual funds

Source: Bank of America Merrill Lynch

Investor wariness of consumer discretionary stocks, which do tend to do better when the economy picks up, makes less sense. Among the most unloved in the sector, according to Bank of America, are Tiffany & Co., Macy’s Inc, and Ford Motor Co., all of which ought to benefit from fatter wallets. One explanation could be technological change. Inc. is disrupting traditional retailers, and every tech giant from Alphabet Inc. to Uber Technologies Inc., is taking on car makers.  But preliminary data shows that old-line retailers appear to have done better than expected this past holiday season, and Uber is in turmoil, as the Detroit manufacturers move to catch-up.

All of this suggests that investors may be shopping in the wrong place for returns in 2018.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.