Robust Demand Is Keeping Stocks Strong, Despite Naysayers

September retail sales confirmed strong demand, up a huge 20.6% compared with September 2019, pre-pandemic. U.S. third-quarter credit card billings were up 25.2% versus the same period in 2020, according to an analysis from Merion Capital — showing that consumer spending is roaring ahead.

Since the consumer constitutes 70% of the economy, I'm watching the surge in spending closely. Note that we still have pent-up demand, which bodes well for the overall economy. The consumer savings rate, according to the St. Louis Fed, was at 9.4% in its latest reading in August, still well above the historical average of 5%, amounting to $2 trillion in consumer excess savings, according to Merion Capital and Cornerstone Macro.

What to Look for When Choosing Stocks

Many U.S. companies have done an enormous amount of work keeping their companies focused, restructured, lean, and delivering — and it's "so far, so good" on earnings. This correlates with indicators showing spending, higher wages and expanding employment as select companies continue to thrive. 

That said, as earnings reports roll in, expect to hear from "haves" and "have-nots." For instance, some companies have the ability to raise prices to address inflationary pressures without affecting the bottom line, while others clearly do not. This pricing power is a key factor in their ability to gain operating leverage, protect margins and stay profitable.

I am also drawn to forward-thinking companies that foresaw the supply chain issues 12 months ago and planned for possible disruption. They expanded their raw-material or finished-product sourcing to multiple countries, instead of just relying on one or two. Now, a year later, these organizations are well positioned to benefit from renewed consumer demand. I am staying away from companies that lacked this foresight and are scrambling to fill orders, with negative impacts on their bottom line.

I remain optimistic about equities, with caveats. Because I think inflation will stay stronger for longer, I am favoring value stocks, those that stand to benefit from the recovery, and reopen names that are seeing resurgent demand. Economic indicators are telling us that the economy is doing just fine, as the delta variant has receded. Thus, in a year of back-and-forth market rotation, value stocks make sense in the fourth quarter. 

We have our V-shaped recovery, which explains why the S&P is up over 20% year to date. Looking ahead to 2022, however, the Fed will have its work cut out for it getting inflation reined in without sacrificing growth. 

Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower. She leads the firm's Investment Solutions Group, which specializes in outsourced chief investment officer services, model portfolios, separately managed accounts, investment research and due diligence for Hightower advisors. Follow Stephanie on LinkedIn and Twitter @Stephanie_Link.