The circumstances are always changing, but successful investors look beyond the present situation.
Everyone likely knows that something is up with the U.S. economy — it’s a major talking point for the upcoming presidential election. That said, it’s hard to say what exactly is happening. But Dollar General (DG -0.57%) CEO Todd Vasos believes he has a better idea than most.
On Aug. 29, Dollar General reported its financial results for the second quarter of 2024, and Vasos went into finer detail than usual to discuss what’s happening beneath the surface. And for low-income Americans, the picture isn’t pretty.
Dollar General has over 20,000 locations and positions itself in rural areas where people might not have many shopping options. But these tend to be lower-income areas, meaning that a large percentage of its customers — over 60% — earn less than $35,000 per year. This income bracket is struggling.
Vasos says that 30% of its customers have maxed out at least one credit card, and about one-quarter believe they’ll miss a payment in the next six months. This situation is affecting consumer behavior, and Dollar General isn’t the only company seeing it.
What’s happening with the economy?
Since many of them are struggling to pay the bills, Dollar General’s customers are cutting back on discretionary purchases and only buying the essentials, such as food. Rival Dollar Tree (DLTR -2.91%) noticed the same trend in its Q2 2024. At both its Dollar Tree chain and its Family Dollar chain, sales for consumable products were up, whereas sales for discretionary items were down.
According to Dollar Tree’s management: “As we have seen for several quarters now, demand from Family Dollar’s core lower-income customer remains weak.” This is what Dollar General has observed.
It’s more than just the dollar store chains. Even an e-commerce giant such as Amazon (AMZN 0.91%) is noting some related trends. CEO Andy Jassy recently said: “We’re seeing lower average selling prices or ASPs right now because customers continue to trade down on price when they can.”
Management at Walmart (WMT 1.31%) agrees that everyone is looking for value. But it offered an additional insight that bears mentioning. The company’s CFO says: “Upper-income households [are] continuing to account for the majority of gains.”
Putting all these insights together, it seems that lower-income consumers are struggling, whereas people in higher income brackets are fine. Now, I know that this sounds intuitive, but it’s actually a little unusual. During tough economic times, people often change behavior regardless of income brackets.
Investors can look at companies such as RH (NYSE: RH) for additional insight here. RH sells luxury furniture, and provides other services to upper-income individuals. The company expects to grow its revenue by 5% to 7% this year, in a relative show of strength for high-income customers.
In other words, it appears that higher-income individuals are continuing on as if things are normal with the economy. But lower-income individuals are struggling to make ends meet and have consequently modified their spending habits.
What does it all mean for investors?
Everyone wants to know what’s going to happen with the economy so that they know exactly how to “play” it. But I’m afraid it’s impossible to say what will happen next, because the past isn’t a reliable guide for the future.
Investors can certainly find similarities to past economic cycles. But how things are playing out are unique to right now. Stanford professor Scott Sagan once wryly said: “Things that have never happened before happen all the time.”
Therefore, if you’re looking for a detailed stock market playbook for the next year or so, I’m sorry to disappoint you. I don’t have one.
The truth is that investors don’t know what’s coming next. Ironically, investors never actually do. But there are times — like now — when investors feel less confident than they normally do. When things are going well, people think they know exactly what will happen, even though they don’t. It’s only when things start going downhill that they feel uneasy.
However, there is an actionable takeaway nevertheless. It just might not be the expected takeaway.
Investors must invest in companies for the long term. Trying to make an investment based on where we are in the economic cycle, monetary policy, or geopolitics will yield lackluster returns because those are things we can’t predict. Commentary from management teams at Dollar General and Walmart can be helpful to a degree. But investors still need to think in terms of years rather than months.
Famous investor Warren Buffett said: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” That’s the spirit behind this. Investors need to buy shares of top companies that are positioned to thrive in a variety of potential economic environments.
I could probably come up with a long list of stocks that I wouldn’t mind owning for the next year or so, based on my assumptions of what will happen next with the economy. That list gets much shorter the further out I set my sights. But the list I create with a longer-term mindset will likely be of much higher quality, since I’d weed out the ideas that need things to go exactly according to my near-term assumptions.
The economy is in an interesting place, and we likely haven’t seen things exactly as they are right now. But developing a long-term investor mindset is still best, regardless of what happens next.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Quast has positions in Dollar General. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
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