In the second quarter, the U.S. economy expanded at its fastest pace in nearly four years. Hailing the latest report from the Department of Commerce, President Trump said the economy had just completed “an economic turnaround of historic proportions.” Trump, who had been predicting a strong GDP report, claimed that this level of growth was “very, very sustainable.”
The jury is still out on that particular view. However, a robust rebound in consumer spending was one of the primary factors responsible for the quarter’s gains. Since the factors that created this spurt in spending remain firmly in place, it makes sense to bet on consumer discretionary stocks at this point.
Consumer Spending Picks Up
According to the Department of Commerce’s first estimate, U.S. GDP increased at a 4.1% pace in the second quarter. This is the sharpest pace of growth experienced since the 4.9% pace registered in the third quarter of 2014. Additionally, the first quarter’s figure was revised upward from 2% to 2.2%.
Consumer spending, which makes up nearly 70% of U.S. GDP, increased at a 4% pace during this period. This is the sharpest pace of growth witnessed in the last three and a half years. Further, it comes after the sluggish 0.5% pace registered during the January-March quarter.
During the second quarter, households purchased more motor vehicles. Expenditure also rose on healthcare, utilities, food and accommodation. The factors driving higher consumer spending include a robust labor market which generated an average 215,000 jobs per month during 1H18.
Other factors boosting consumer spending are tax cuts and higher wages. Meanwhile, consumers have also chosen to save less and have even posted higher credit card spends recently.
Is the Current Pace Sustainable?
The Trump administration has used a combination of tax cuts, deregulation and higher spending to get consumers and businesses to spend more. But skeptics believe that this pace is unsustainable and retaliatory tariffs could significantly dampen economic expansion in the quarters ahead.
The spurt in exports, for instance, which grew at their fastest pace on four and a half years, can be traced to the impact of retaliatory tariffs. Soybean exports were speeded up in an effort to beat the impact of tariffs China is likely to impose in the days ahead.
A section of economists believe that a U.S.-China trade war would indeed reduce the pace of growth. However, progress made on trade issues with the EU is heartening. Meanwhile, Goldman Sachs GS recently predicted that the impact of trade disputes on growth would be “typically modest.”
The financial major thinks the resultant reduction in output would only be around 0.2%. With output having expanded at 3.1% in 1H18, the economy would still be on course to hit the Trump administration’s 3% annual target in this scenario.
A combination of tax cuts, deregulation and higher government spending boosted GDP in the second quarter. Consumer spending, in particular was a major beneficiary. Though some economists believe that retaliatory tariffs could dampen growth in the months ahead, the impact of trade tensions is likely to be highly limited.
Investing in consumer discretionary stocks looks like a smart option at this time. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
Polaris Industries Inc. PII is a designer, manufacturer and marketer of power sports vehicles.
Polaris Industries has a Zacks Rank #1 (Strong Buy) and VGM Score of A. The company has expected earnings growth of 34.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 30 days.
American Woodmark Corporation AMWD is a manufacturer and distributor of kitchen and bath cabinets for the home construction and remodeling markets in the United States.
American Woodmark has a Zacks Rank #1 and VGM Score of B. The company has expected earnings growth of 43.8% for the current year.
Penn National Gaming, Inc. PENN is a leading, multi-jurisdictional owner and manager of gaming and racing facilities with video gaming terminal operations, and a focus on slot machine entertainment.
Penn National has a VGM Score of B. The Zacks Consensus Estimate for the current year has improved by 7.9% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Funko, Inc. FNKO is a pop culture consumer products company. It offers figures, plush, apparel, toys, vinyl, bags, wallets, homewares and accessories under multiple brands.
Funko has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 73.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.8% over the last 30 days.
Johnson Outdoors Inc. JOUT is a designer, manufacturer and marketer of outdoor equipment, watercraft, diving and marine electronics products.
Johnson Outdoors carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 52.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.5% over the last 60 days.
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Penn National Gaming, Inc. (PENN) : Free Stock Analysis Report
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
American Woodmark Corporation (AMWD) : Free Stock Analysis Report
Polaris Industries Inc. (PII) : Free Stock Analysis Report
Johnson Outdoors Inc. (JOUT) : Free Stock Analysis Report
Funko, Inc. (FNKO) : Free Stock Analysis Report
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