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What Comes First: Consumer Confidence Or Spending? Communications Sector Might Hold Clues

JJ Kinahan

Investors can probably thank the resiliency of the consumer wallet for a Communications Services sector that’s expected to be among the more muscular Q4 earnings performers.

The sector, sometimes called “Comms,” is heavy with consumer-centric companies that, not surprisingly, broadly depend on a healthy consumer. And consumers appeared to stay resilient through the sometimes topsy-turvy events that marked chunks of 2019.

Through the likes of AT&T Inc (NYSE: T) and Verizon Communications Inc (NYSE: VZ), the sector includes the companies that support how we communicate with each other.  And through others like Facebook Inc. (NASDAQ: FB) and Google-parent Alphabet Inc (NASDAQ: GOOG), the sector includes how we reach the greater world.

It also contains consumer discretionary stocks that entertain us—think Walt Disney Co (NYSE: DIS) and Netflix Inc (NASDAQ: NFLX)—as they step up competition for share of screen time.

To that extent, it might be said that the sector has a pulse on the economy overall. Or does the economy take its cue from Comms? Either way, Comms tends to track the broader S&P 500 index relatively closely.

Low Unemployment = Consumer Spending Confidence

Though the U.S. labor market ended 2019 with fewer-than-anticipated job gains and only slight wage growth in December, the jobless rate stayed at its 50-year low of 3.5%, unchanged from November.

“The winds have shifted in favor of the consumer when you have an economy at full employment,” said Jim Glassman, head economist for JPMorgan Chase Commercial Banking.

That’s probably best reflected in consumer sentiment, such as the one tracked by the University of Michigan Surveys of Consumers. In December, the latest numbers available, what’s called the Sentiment Index rose to a jaw-dropping 99.3, posting its fourth monthly gain from the August low of 89.8. Since the start of 2017, the Index has averaged 97.0. That represents the second-best extended period of optimism recorded in the long history of the surveys, according to Richard Curtin, economist and director of the surveys. The most favorable average level? It was during the four years from 1997 to 2000, when the index averaged 105.3.

As an aside, that previous period of high consumer sentiment also contained presidential impeachments—Bill Clinton back then and of course Donald Trump currently. Each one had a “barely a noticeable impact on economic expectations,” according to the survey, which cited mentions by only 2% of consumers polled.

Lower long-term inflation expectations were at 2.2% over the next five years, the lowest long-term inflation rate expected since this question was first asked in the late 1970s, according to Curtin.

“Lower long-term inflation affects not only consumer spending and saving decisions as well as judgments about wages,” he said, noting that it could also influence policies aimed at avoiding or limiting the impact of the next recession.

“To be sure, no recession is expected by consumers in 2020,” Curtin added. “Nonetheless, while consumers recognized and applauded the recent decline in unemployment, they now anticipate that the national unemployment rate is more likely to start edging upward rather than downward in the year ahead.”

The Winners Take....

Among the Comms sector stocks, TD Ameritrade clients were big fans of DIS, according to the Investor Movement Index (IMXSM) that tracks investor activity. DIS has been on an upward trajectory on a year-over-year basis to post a 35% rise when it hit its 52-week high in late November.

On the sell side, TD Ameritrade clients also used record highs to pare back on shares of NFLX while also lightening up on FB shares. NFLX stock hit a record high in May, up 52%, and bounced around until early July when it bottom out in late September, giving back some 33%. It has been trending moderately higher since then.

Though it didn’t make the TD Ameritrade top-five in buying or selling stocks throughout 2019, shares of GOOGL hit a series of record highs and continues to into 2020, up 38% since bottoming in early June.

What To Watch

Overall, the Comms sector’s components are expected to post $34.3 billion in profit for Q4, according to Refinitiv. That’s more than 16% higher than the year-ago results of $29.5 billion. Interactive media and services companies are likely to help power the growth with a 51% gain, the firm said.

Other things to listen for on earnings calls include regulatory concerns—there are still ongoing antitrust investigations and calls for greater scrutiny over data sharing and privacy, for example. For companies racing to upgrade to 5G—VZ and T are top of mind—you might want to look for progress reports on the rollout, how much it’s going to cost, and what kinds of revenue projections might be in store. Keep in mind that 5G is still in the infrastructure stage so these companies could focus on build out and acceleration of deployment of 5G for most of 2020.

And finally, as DIS and others join the streaming war in hopes of cutting into NFLX’s dominance, it’s worth keeping an eye on subscriber numbers, as well as the numbers related to companies’ original content.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

Image by mohamed Hassan from Pixabay


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