Commentary by Joe Clark
Summer is here, theme parks are open and roller coaster lines are long. The millions spent to construct a single coaster attest to thrill seekers’ appetite for adventure. “Wild rides” on a coaster are fun, but most investors prefer a steadier course when it comes to retirement planning.
In the spirit of summer, let’s look at parallels and distinctions between theme parks, equity markets and the greater economy. Dollars spent by theme park visitors are what we call “discretionary dollars” – money consumers choose to spend. In contrast, “staples” are purchases consumers must buy – like housing.
Housing is a “staple” tightly linked to employment numbers and the economy. We watch employment numbers to know when household income should be increasing and we track where household money is being spent. Housing sales are the strongest they’ve been in five years – great news for homeowners, builders and furniture stores. Of course, as consumers spend money on their homes, the money they spend on discretionary purchases in the economy – like theme parks– may be redirected.
Assessing the economy through a single filter is difficult. Overlooking a dollar here or there can lead to serious economic revisions. The equity markets often move when new economic data is released, yet oddly enough, markets frequently ignore subsequent revisions.
Investors should look broadly at the economy to identify sectors where consumer dollars are being invested and the areas that are shrinking. Remember, equity markets differ from the economy in certain ways. The economy cares about the larger view of the broad economy and measures it against all goods and services produced. In contrast, equity markets tend to care about trajectory and rate of change.
The next election season is already highlighting trade deals, immigration and issues that may change the way our economy expands in the future. Investors must consider how certain issues will help or hinder their returns. If housing performs well, but theme park attendance withers, amusement park earnings may plummet while the overall economy remains strong. In such a scenario, roller coaster company shareholders would not be happy, even in a rosy economic environment.