Chart of the Week: November 25, 2015

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Over the past few weeks, questions about the strength of the U.S. consumer have arisen from disappointing department store earnings announcements and an October retail sales number that came in below consensus expectations. Although the outlook for consumer discretionary was weakened by several retailers reporting worse than expected earnings, it is important to recognize, when gauging the current and future strength of the consumer, that the majority of consumer spending has shifted from a typical trip to the mall toward experiences and services. In fact, clothing and footwear make up a small 3% of consumer spending, whereas services account for close to 67%. On top of that, traditional brick and mortar retailers are facing significant competition from internet sales, which are capturing market share at their expense. As a result, and as shown in this week’s chart, this has manifested itself in the outperformance of internet retailers compared to traditional department stores over the past couple of years. With improving fundamentals such as a tightening labor market and low gasoline prices supporting the U.S. consumer, we anticipate seeing continued strength but reiterate that selectivity, particularly within consumer discretionary, will be paramount given ever-changing patterns of consumption.

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(Source: JPMorgan)

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