Sarah Henry, Managing Director and Portfolio Manager, joined Reuters TV Sectors UpClose to discuss the consumer sector as tariff uncertainty continues to impact consumer behavior.

Host:
The US consumer is still shopping despite tariff worries, but for how long?
This is Sectors Up Close and we're talking consumer discretionary stocks. That sector is down almost 7% year to date. While the broader S&P 500 is now higher for the year. The worry is that tariffs will push inflation back up and force consumers to rein in their spending. But how damaging could that be for America's consumer giants? Sarah Henry is a portfolio manager at Logan Capital. Sarah, the data doesn't yet show that Americans are reigning in their spending all that much, does it?

Sarah Henry:
No. I think right now the current consumer is reasonably solid. Unemployment is holding steady at 4.2%. We have seen some questionable data back and forth with consumer confidence, vacillating a little bit. But in general, the employment trends have been solid and consumers continue to spend money.

Host:
Could they be stocking up though before tariffs raise prices?

Sarah Henry:
Absolutely. So nominal consumption spending grew five and half percent year-over-year, which is a really strong pace so far, year-to-date. And the strength in spending does reflect some pull forward due to tariffs. But the pace of growth indicates that on the whole, the consumer has healthy balance sheets and a strong willingness to spend. The whole thing is underpinned by a healthy employment situation. Consumers do seem pretty undeterred at this point.

Host:
Economists do expect tariffs to raise prices this year though, so how long might it take before we start to see a drag on consumer spending?

Sarah Henry:
You got it right. Tariffs are currently in the market and the story is when, not if they will be hitting inflation and causing inflation to tick up. Which has been noted as an area of anxiety within consumer confidence numbers for consumers. This will put the Fed on hold on rates for the time being, and we should also see a hit to GDP in the range of 40 basis points from tariffs alone. So if you look back on the 2018 tariff war, the lag is likely to be in range of three to six months, which would impact inventories for back to school and set the tone for the holiday season.

Host:
Does that mean you're expecting weak data for the third quarter then?

Sarah Henry:
Yes. So the third quarter, we'll definitely start to see the impact and the largest drag should hit in the fourth quarter of 2005 and the first quarter of 2006, when the economy will then also feel the drag from labor market weakness, as unemployment ticks up and lowers spending on goods. And continued policy uncertainty is certainly holding back businesses in terms of their spending.

Host:
We keep hearing that consumers are looking for value, so does that mean the lower end of the market, the discounters, will benefit?

Sarah Henry:
It's a good question. The lower end of the market has fewer levers to pull. They don't feel the wealth from the stock market, they don't feel the wealth from the real estate market. So this is an area of concern for the entire economy and whether they keep spending. Looking at retailers that should sort of be well positioned, ones that have a strong value narrative, many of these companies in their most recent earnings season talked about a value-seeking consumer and various ways to absorb these tariff pressures, given really narrow retail margins. Some are taking other measures, increasing their private label offerings, pulling forward inventory purchases, and holding higher levels of inventories than they have historically done at this part of the year.

Host:
How should investors position then, should you be wary of buying consumer-facing stocks at all?

Sarah Henry:
I think it's important to look at history. This very much feels like it rhymes with the COVID drama that we have lived through, with the supply chain in the last year and the attended rising prices. Looking at past history, there have been companies that have been very well positioned and they share the same qualities over time, and they do exist in the consumer realm. Names like Mondelēz, McDonald's, and T.J.Maxx, all which share a long history of growth and rising dividends, returning cash flow to shareholders. These companies have the types of positioning and favorable attributes that allow it to have better terms with their vendors, have more ability to negotiate with their partners, with their real estate. And are well positioned geographically, in a diverse way, that allows them to hit some of the higher growth markets internationally and the strong cash flow markets in the US. So, would not avoid the consumer names, but sort of cleave to the more well capitalized and names with historic benefits that have lived through these periods in the past and done well.