Consumer Concerns and Equity Opportunities

Current Consumer Sentiment and Corporate Outlook:

• Consumer sentiment is challenged, with University of Michigan readings hitting the second-lowest level on record last week.
• Major consumer corporations report that sales activity slowed beginning in October.
• Despite current headwinds, Scott Filer (Goldman Sachs) states the consumer situation is not as dire as some market narratives suggest.
• Corporates are adopting a more cautious tone regarding the upcoming holiday season compared to previous assessments.

Earnings Season and Market Performance:

• Weakness has broadened beyond low-income segments; recent earnings reveals include misses and guidance cuts from large home improvement firms.
• The "goods versus experience" post-pandemic trend is fading, with slowing observed in both categories.
• Service sectors, specifically cruise lines and restaurants, are reporting a pullback in volume.
• Restaurant slowdowns are specifically attributed to price sensitivity among the 25–35 age demographic (Gen Z).

Black Friday and Holiday Spending Trends:

• Despite the October slowdown, Black Friday and the broader holiday season are projected to perform well as consumers concentrate spending around specific events.
• Weakness is concentrated in "in-between" non-event periods (e.g., October) rather than peak shopping events.
• Consumer engagement remains high for events like Back-to-School, which preceded a temporary slowdown.

Inflation and Pricing Pressures:

• Consumer pushback against price increases has emerged in October, marking a shift from earlier periods where costs were absorbed.
• Price sensitivity is becoming more pronounced in sectors that aggressively raised prices during the pandemic, including autos (aftermarket retail) and restaurants.
• The government shutdown has created a data gap regarding inflation, yet tariff adjustments on items like bananas and coffee are underway to ease costs.
• Core consumer staples businesses are currently challenged by inventory destocking and consumers trading down to private label brands.

Forward-Looking Statements and Investment Strategy:

• An estimated $60 billion in incremental stimulus spending (tax refunds) is expected to boost the consumer in the first half of 2026.
• Filer recommends owning "defensive discretionary" names over cyclicals, citing that significant negativity is already priced into the sector.
• Preferred investment targets include off-price retailers and auto parts retail, which offer a discretionary nature with defensive characteristics.
• Traditional core consumer staples are currently avoided due to inflation challenges and high existing inventory levels among consumers.