For a term that has such a broad and flexible definition, “middle-class” is an expression that is constantly heard in discussions about the economy and politics.
In terms of investing, the notion of the middle class is an important one for a number of reasons. As CNNMoney pointed out in May, about 50 percent of middle-income adult Americans, defined as individuals making between $35,000 and $70,000 a year, were invested in equities, a figure that was 16 percent higher prior to the financial crisis of 2008. This sort of data has led many to point out that the fruits of the much-heralded bull market that has gained steam in 2013 and had the S&P 500 closing on a new all-time high as recently as Monday are increasingly being enjoyed by upper-middle class and especially wealthier Americans.
But the increasingly limited ability on the part of middle-America to participate in the wealth-creation that is currently taking place on the stock market is not only a manifestation of growing income inequality in the US. The trend also affects the stock price and performance of publicly traded companies.
As the financial crisis and collapse of the housing bubble in 2008 along with the subsequent recession has wiped out large swathes of personal and family wealth, those who previously had enough income to invest in equities have found themselves allocating larger percentages of their shrinking income to more immediate needs, such as keeping up with mortgage payments and putting food on the table. The situation is compounded by cuts to government spending that resulted from the sequester that automatically took effect on March 1 of this year, along with the expiration of the Bush-era payroll tax cuts.
Meanwhile, wages for middle-class Americans have been stagnant, and along with the still relatively weak job market, the situation is not only bad for investments, but has also put a damper on consumer spending. On Monday, Bloomberg reported that “the economy ended the second quarter on a weak note,” as consumer spending figures indicated a 0.4 percent increase in sales for retailers, a number that was short of estimates by half. The report also noted that consumer spending, some 70 percent of the economy, increased at an annualized rate of 1.5 percent for the second quarter, lagging behind expectations of 1.7 percent.
Middle-class consumer spending habits have unsurprisingly changed along with these figures. Not only are middle-income consumers more likely to hold off on extraneous expenses such as shopping and eating out, they are also spending more of their money at bargain or discount stores that range in quality and pricing from Target (TGT) and Costco (COST) on the higher end to Family Dollar Stores (FDO) and Dollar General (DG) on the lower end.
A look at the performance of discount variety stores over the past six months would seem to confirm this to some extent. Several US companies in the sector have seen quarter over quarter sales growth of nearly 8 percent or greater, and their stocks all have positive performance over the past six months to show for it.
Family Dollar Stores tops the list with 9 percent quarter-over-quarter sales growth, with the stock up over 21 percent over the last six months to $68, followed by Dollar General with 8.5 percent quarterly sales growth and up over 25 percent in the past half year to $53.90.
Dollar Tree Inc. (DLTR) is in third place, with 8.30 percent quarter-over-quarter sales growth, with shares trading at $53.17, up 40 percent over the last six months. Costco is not far behind, with 7.9 percent quarterly sales growth, and shares trading for $116.53 on a 43 percent advance over the past half year.
By comparison, other sectors such as department stores have not done nearly as well in terms of sales growth, and this applies even to super-cheap retailers such as Wal-Mart (WMT) .