Domestic equities celebrated a big anniversary this week. In case you weren’t invited to the party, the bull market turned six years old on Monday. In the wake of the Great Financial Panic, the S&P 500 has more than tripled since March 2009.
What now? Well, despite recent wobbles, the old bull still has legs. At least according to one of the more quaint but reliable indicators of economic expansion. Consumer confidence is growing and that’s reflected in expansive discretionary spending.
Compare the track record of the Consumer Discretionary Select Sector SPDR (NYSE Arca: XLY) to that of the Consumer Staples Select Sector SPDR (NYSE Arca: XLP). XLY tracks an 86-stock subset of the S&P 500 Index that includes entertainment giant Walt Disney Co. (NYSE: DIS), retailer Home Depot, Inc. (NYSE: HD) and fast food category killer McDonald’s Corp. (NYSE: MCD). XLP represents a smaller slice of the S&P 500—a 40-issue swath studded with Proctor & Gamble (NYSE: PG), Coca-Cola Co. (NYSE: KO) and Wal-Mart Stores, Inc. (NYSE: WMT). From the top of the year to the March 9 bull market anniversary date, XLY has gained five percent versus a one percent rise in XLP. This year, consumers seem willing to part with more of their hard-earned dollars for movies, home improvements and meals out.
And why not? Even though recent employment data shows anemic wage growth, the low prevailing inflation rate has actually boosted workers’ real income. Look at the current data set: average hourly wages have increased two percent over the past year. Couple that with a 3.3 percent hike in hours worked and you have an increase in total wage income of 5.3 percent. The year-over-year CPI inflation rate was most recently clocked at zero, meaning real income growth is 5.3 percent. That kind of money buys a lot more burgers, movie tickets and patio furniture.
The XLY/XLP price ratio has been in uptrend since late 2008 when it bottomed at 0.80. Back then, fearful consumers spent their money on everyday staples rather than nights out on the town. Now, after a period of consolidation that tested the 1.4 level, the ratio has broken to the upside. That sets up a revisit of the 1.6 level.
The aging bull market may spook the pundits, but patient investors should just relax with a Big Mac on their patios. The odds point to more upside.
Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.