2018 Year-End Letter, Part 3: Sectors: Consumer Discretionary and Communication Services

Consumer Discretionary:

Take a look at the top 10 names in our core consumer discretionary sector ETF:

Home Depot
Booking Holdings
General Motors

Question is, going forward will folks have the will and the resources to buy stuff online, fix up their homes, grab the occasional “Happy Meal”, replace their old tennies, enjoy more of their favorite “Vente Skinny Vanilla Latte with Coconut Milk”, grab a few new garments, trade in the old clunker and buy any of the bazillion of things offered at Target? And if so, to what extent?

Here’s the latest (last weekend) read from the consumer data section of our macro index:

Here’s from last year’s year-end letter:

Yeah, definitely some deterioration over the past year. 

While today’s look is concerning relative to a year ago, here’s what it looks like when the economy’s about to roll over into recession:

(our October 11, 2007 back test)

So, if I hadn’t shown you last year’s, you’d be thinking today’s looks pretty darn good, especially up against October 2007’s.

Fact is, today’s look is indeed what I’d call “pretty good”. Certainly not a look that screams recession looming!, like 2007’s.

While, at 18.4 times next year’s earnings, the sector isn’t cheap (like financials), given the presently okay economy, the strong state of the U.S. labor market, the U.S. consumer’s penchant for spending, the prospects for today’s biggest dark macro cloud (read trade war) to dissipate over the next few weeks/months, and the now (per the latest from Fed Chair Powell) somewhat cautious Fed, we’ll be sticking with our 12% target to consumer discretionary stocks for the time being.

Communication Services:

Here are the top 10 positions in our core communication services sector ETF:

Charter Communication
Twentieth-First Century Fox

Yeah, Facebook’s having some issues. Question is, with its still massive global user base, will it figure things out and will advertisers continue to buy their billions worth of ads in the years to come. Well, of course the latter depends on FB’s ability to maintain the former. Time will tell, but I’m guessing that the horror of missing out on the next video of Aunt Sallie’s cat having kittens will keep most folks engaged for a long time to come.

Beyond FB, the prospects for Alphabet (Google), and the rest, to grow their franchises among today’s info-hungry population are pretty good. And when we consider the possibilities around 5g wireless technology, particularly for the providers (Verizon, AT&T, T-Mobile), the longer-term prospects for the sector are, let’s say, interesting, to say the least.

While our 5% target seems modest, if not very low, the sector correlates quite highly with the consumer discretionary sector (as you might imagine looking at the names). I.e., combining the two puts 17% of the portfolio into names that pretty much move in tandem. Should we choose to increase our communication services exposure going forward (a distinct possibility), we’ll likely offset it by taking down our consumer discretionary target by an equal %.


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