Stop Buying Stuff, Plan to Splurge on Fun Activities Instead

Summary

• Goods-oriented consumption has soared over the past year and spurred a strong rally in the retail XRT ETF, especially since the election.
• Looking ahead, consumer spending should start shifting toward more leisure-oriented activities.

Market Implications

• We recommend investors start rotating out of goods-oriented retail stocks and ETFs.
• We suggest AWAY, JETS and PEJ, all of which have significantly underperformed XRT over the past year.

An Upbeat Note in a Downbeat Year

Most people will remember 2020 and 2021 (at least so far) as a decidedly downbeat period. Yet there were surprises, too – among them how robust the consumer proved to be. Personal consumption expenditures was little changed year over year, but that was largely because COVID 19 restrictions forced people to curtail spending on services (Chart 1). Instead, spending on goods surged a remarkable 10.5%. Retail sales, which are mostly goods-oriented, jumped 10.8% (Chart 2). (Comparisons are with the period before the Covid-related collapse, when the economy was still somewhat normal.)

The divide between goods and services is particularly stark when comparing the robust goods component of retail sales with the service-oriented food services and drinking places (about 9.5% of total retail sales), which collapsed 16% year over year. Much of that money was spent on groceries instead. In dollar terms, spending in the grocery and beverage store component (part of the goods sector) jumped $7.6bn, while restaurants and bars fell $10.8bn.

The equity market has duly noted the retail sector’s strong performance. In normal times, the retail EFT XRT tends to underperform relative to the broader S&P 500. Between the March 2020 market low and the election, it caught up with, then roughly tracked, the S&P 500 (Chart 3). We observed in a previous note that online retailers (represented by the IBUY and ONLN ETFs) were particularly strong performers during that time. Since the election, the XRT has outperformed by a massive 33% (Chart 3). At one point during the GameStop frenzy, it was up 53% versus the S&P 500.

The Rotation Trade Is Away from Goods and Into Leisure

All things considered, we expect the service sector largely to recover during 2021. As more people receive vaccinations and COVID risk recedes, people will travel and socialize more and resume eating out and going to bars.

We favour rotating out of the goods-oriented XRT ETF and into ETFs that will benefit from a recovery in the travel and leisure sectors. These include AWAY, JETS, and PEJ. AWAY focuses on companies that facilitate travel and tourism through online apps. JETS is a pure play on the airline industry. PEJ holds a variety of stocks in the leisure/entertainment sectors, including casinos, hotels, restaurant chains and theme parks.

All three have significantly underperformed the retail XRT over the past year, although AWAY has been strong in recent months (Chart 4). Of the three, JETS appears to offer the most upside. In our view, it may be difficult to call how people will spend their leisure dollars (Disney World? Beaches? Visiting grandparents?). But they will board airplanes whatever they choose. The key uncertainty here is when more profitable business travel returns – a topic where consensus is elusive.

If, as we expect, the economy progresses steadily toward normal in 2021, we look for an ongoing rotation out of goods-oriented retail as people resume postponed leisure activities.