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Macro Investing Trend: US Consumer Trade Down

Posted on | June 20, 2011 | Comments Off

One of the most important factors in selecting stocks for your dividend portfolio is to make sure the companies line up with major macro themes that you have a good level of confidence in that they will play out.  One of the most important macro themes in my opinion facing the American economy is the trading down effect of the US consumer.  This goes hand-in-hand with a standard of living shift, but specifically, we’ll label it as trading down, as you will see.

A number of issues will force this mass trading down effect.  First, the baby boomers are trying to retire.  Most don’t have enough money.  Many were planning on their homes to be used as sources of retirement funds.  The ones that want to work later are finding it difficult to do so amidst high unemployment.  Simply put, the possibility of retirement is very iffy for millions of baby boomers.  For them to have any semblance of a retirement, a massive drop in standard of living will need to commence.  A trading down will need to occur in lifestyle and what they consume.

Next, there is a decline in the standard of living for the average Joe in America as well.  Coming off the largest boom in consumption fueled by skyrocketing home values, millions of average Americans are seeing their standard of living go down. Let’s be honest, it had nowhere to go but down, and that is indeed what is happening.  Too much debt, too few jobs, all add up to trading down.

Lastly, the government and monetary policies will lead soon move towards a combination of austerity and inflation. It doesn’t matter which one we have more of, because the effects are the same.  A lower standard of living.  Too much debt has left the government in a corner with the choice between painful cuts and/or printing money to plug the holes.  We’ll go both in varying degrees depending on the political climate of the day or week.

We’re going to see massive trade downs in the macro environment for many reasons including the ones outlined above.  This is as sure a trend as we’re likely to see barring some major new discovery or invention or cheap energy source.  As such, we’re heavily invested in this trend with the following stocks:

  1. McDonald’s Corp (MCD) - The cheapest food for people to eat
  2. Wal-Mart Stores, Inc (WMT) - The cheapest goods for people to buy

Both McDonalds and Walmart are our two big “trading down” stocks where more and more of the public will be trading down to more inexpensive products as their money purchases less and less with each passing month and year.  Please note that both stocks have great international stories as well that will help fuel earnings growth.  Both also have great dividend growth with a dividend that should continue to pay out more each year.

I encourage you to read up more on Walmart and McDonald’s to see if they might fit in your portfolio.