During good times, stocks of companies targeting high-end consumers tend to outperform those catering to low-end consumers, according to Tobias Levkovich, Citi’s U.S. equity strategist.
To better serve clients looking to trade this phenomenon, Citi’s has two proprietary indices: the “Living Large Index” and the “Thriving & Thrifty Index.”
The Living Large Index consists of upper-income consumer stocks like Tiffany & Co, Coach, Wynn Resorts, Estee Lauder, Tempur-Pedic International, Nordstrom, MarineMax, Callaway Golf Co., Orient-Express Hotels, Toll Brothers etc.. The Thriving & Thrifty index is a basket of consumer stocks like Wal-Mart, McDonald’s, and AutoZone that cater to lower income Americans.
Levkovich thinks investors need to consider that the living large index will appreciate later this year:
“When the S&P 500 is climbing, higher end consumers get wealthier and are perceived as willing to spend; thus share prices of companies that focus on that consumer segment do well. If stock indices are falling, Living Large relative underperformance ensues. With markets likely to move sideways (with a downward bias) at least until companies report quarterly numbers next month and provide lowered 2H12 guidance, there may not be much of a relative trade to put into place, but we foresee stronger Living Large appreciation later this year.”
This chart shows the performance of the Living Large index against the broader market: