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How To Play The State Of The U.S. Consumer

6 May 2008 One Comment

We have had a recent rally in the stock market off the lows of the year and it seems, all “experts” say the U.S. is not headed for a recession. However, just because the stocks are up does not mean the average consumers are feeling any better about the economic conditions that they are feeling in their lives. Let’s look at the possible reasons for and consequences of a weak U.S. consumer.

Cost of living is going up across the board with record food and energy prices. Couple rising prices with a slowing economy and weakening job market, and consumers HAVE to cut back, right? It seems that in some instances they are and in others they are not. For those consumers who haven’t cut back much despite many factors suggesting that they should, it seems credit cards are fueling their continual spending.

Credit cards may be helping the consumer get through higher costs for a while, but with higher prices, especially in energy, likely to continue, how long can the consumer continue to rely on a credit card? Americans that are spiraling into more and more debt face a long road with a very tough ending.

20-Somethings Advice

First and foremost, if you are in your 20s, avoid the influence of our culture that says you must have the biggest flat screen TV and the hottest car. Under no circumstances, should you be adding credit card debt. The argument that you will make more money in a few years to pay off the things you buy now is ridiculous (like you won’t want to buy things in a few years). At 20s Money, we talk about positioning yourself to be able to start putting money away towards your financial future. Not accumulating and getting rid of debt is number 1 when positioning yourself to save for your future.

You should have one credit card that you view as a debit card. I use my American Express for everything simply to earn points and earn free travel. I never carry a balance by paying the balance off each month. Thankfully, I never got into the mentality of using a credit card to purchase things that I could not yet afford. I recommend you fight hard against such a mentality. The freedom from debt related stress is way more important than accumulating more things.

If you have already positioned yourself, and are looking for companies to invest in, you will want to find companies that can perform in any economic environment. These companies are typically referred to as defensive stocks. While usually unsexy, they can provide consistent returns when the broad market struggles. Most defensive stocks come with a hefty dividend yield that can help provide returns in a down market. Check out my previous post on high dividend stocks.

Some defensive stocks to consider:

  • Philip Morris (PM)
  • Altria (MO)
  • Proctor & Gamble (PG)
  • 3M (MMM)
  • Novartis (NVS)
  • Coca-Cola (KO)

If credit card defaults begin to skyrocket, bank stocks will suffer. You may want to avoid the following bank stocks that are highly exposed to credit cards.

  • Bank of America (BAC)
  • Citigroup (C)
  • American Express (AXP)

Retail and other consumer driven companies may also suffer. As I detailed in a previous post, Apple seems to be a consumer driven company that is bucking the trend. So far, the U.S. consumer has been fairly resilient during the recent ugly economic environment. However, with a larger chunk of each paycheck going towards food and energy, and with most Americans’ largest asset, their homes, plunging in value, how long can this trend continue?

As a young investor, your goal is to not fall into the typical American consumer attitude of buying things whether you can afford them or not. If you use a credit card, pay off the balance each month. Don’t sign up for multiple credit cards; you only need one. It is a known fact that credit card companies target people in their 20s. Don’t sign up for a credit card to get a free gift such as a towel of your favorite sports team. You have enough junk.

Position yourself for financial success by not trying to keep up with the your friends, but by saving and eliminating debt. Invest in proven companies whose earnings will grow no matter what the economic environment looks like. By staying true to these principles, your financial future gets brighter each day.

Have any stock recommendations that will perform despite U.S. consumer struggles? Join the discussion and provide your insight below.

One Comment »

  • Florencio Falconer said:

    Thanks for a really interesting read, learn quite a few tips here, trying hard to improve my credit , i did a consumer proposal 7 years ago and just now i am starting to rebuild my credit slowly but surely and trying to avoid that credit card trap.