This Chart Suggests Aussies Have Their Wallets Open

The consumer discretionary sector includes goods and services that are considered non-essential.

While we don’t need these goods and services in order to live, they do enrich our lives.

If consumers are stretched, or are fearful, the purchase of discretionary items are the first to go.

This sector does poorly when consumers feel stretched or worry whether they’ll still have a job next month.

Conversely, this sector does extremely well when consumers feel confident and the economy is doing well.

So this sector can be used as a leading indicator and a gauge for any strength or weakness in the economy.

Around the World

Let’s find out what’s happening around the world.

In the US some of the best performing stocks this year have been hotels, cruise lines and resort casinos.

Travel and leisure stocks are outperforming the general US index, not by a little bit, but by a long way.

In Europe, the company price charts of luxury goods companies like LVMH Moët Hennessy Louis Vuitton [EPA:MC] and Kering [EPA:KER], are busting into all time highs. That tells you both companies are growing sales.

LVMH produce top shelf wines and spirits, luxury fashion and leather goods. Kering is the name behind Gucci, Yves Saint Laurent , and a whole range of other luxury brands.

Both companies exceeded their forecast results in the recent quarter, only confirming what their respective charts was already telling you.

Demand for luxury goods is growing in Europe, the US, but especially in China, which is by far the strongest performing region.

Again this tells you the world economies are unlikely to collapse this year, despite what you might read in the press.

It’s confirming the recoveries going on in China, Europe and shows there’s still plenty of money out there.

Travel Stocks Move Higher

Bringing it home, while the S&P/ASX 200 index [XJO] remains flat, travel related stocks have all moved higher since the start of the year.

Companies such as Qantas Airways Ltd [ASX:QAN] and online travel agency Webjet Ltd [ASX:WEB], are trading around all time highs.

If the consumer was feeling stretched, or worried about job security, you’d think holidays would be the first thing to go.

When we relate that with what’s happening with US leisure stocks, and European luxury goods, the question you then ask yourself is, does any of this suggest an imminent recession?

Whenever I can I like to bring up a chart, here’s the monthly chart of the S&P/ASX 200 Hotels, Restaurants & Leisure [ASX:XYH], industry index.

Source: STEX
[Click to enlarge]

This index represents purely discretionary spending, and it’s been in a solid uptrend since 2012.

It doesn’t suggest any belt tightening is going on. On the contrary, it suggests that consumers are opening their wallets.

It shows the Australian consumer has some confidence where the economy sits right now and that he or she will have a job next month.

Remember this is a leading indicator, the chart topped out in April 2007, a full six months before the general S&P/ASX 200 index [XJO] topped out in November that year.

If the economy was under stress you’d be expecting this index to be breaking lower now. Instead it’s breaking higher, not lower.

Now there are a number of reasons why knowing all this is helpful, but the most important one is this.

Should we get another stock market panic, don’t expect a complete stock market collapse and recession. Not this year anyway, based on the charts and on all the discretionary spending going on around the world.

Markets are likely to recover, just like in the previous panics of recent years.

That is very tradable knowledge, because should we get another market panic this year, then you’ll know it’s a potential opportunity to do the study on good stocks already in a strong, solid weekly and monthly uptrend’s.

If learning to read the economy through the charts is something that interests you, then go here to find out more.


Terence Duffy,
Editor, Money Morning Trader

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia