Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Creating a Luxury-Recession Blind Spot
Transcript
- Lucas: The S&P hit 7,546 today, the Dow touched 52,551, and yet — I keep coming back to something Warren Buffett said at a lunch last week. He said, and I'm paraphrasing, 'it's tough to find values when everybody is preferring gambling.' Luna: That line has been stuck in my head too. Because look at the Russell 2000 — down nearly 1% in the past five days. ARKK off almost 3%. The broad indexes are flat to slightly down, but underneath, there's a real rotation happening. Lucas: Exactly. And I think the most telling pocket right now is luxury goods. Hermès and LVMH are both up over the same period. Not by a lot, but they're positive. Meanwhile, mid-tier retailers and a lot of small-cap consumer discretionary names are getting smoked. Luna: So the classic 'lipstick effect' — consumers trade down on small luxuries but still splurge on the top-tier brands? But that usually happens in a recession. We're in a bull market with 2.1% real GDP growth. Lucas: Right, which is exactly the blind spot. The headline GDP number looks fine, but corporate earnings dispersion is widening fast. You've got mega-cap tech and luxury pulling away, while the rest of the market — especially anything that relies on the consumer at the margin — is struggling. Luna: Let's put some numbers to that. The iShares S&P 100 Growth ETF, IWF, is basically flat on the week. The Vanguard Growth ETF, VUG, is up a tick. But the Russell 2000 dropped nearly 1% and the NYSE composite is also down. So it's not just small caps; it's broad. Lucas: It's a two-speed market, and luxury is the canary. Hermès reported last week — their revenue in the Americas grew 14% year-over-year. That's accelerating from the prior quarter. LVMH's fashion and leather goods division also beat. Meanwhile, a company like Nordstrom — not a luxury name, but aspirational — it's been cut in half from its 2021 high. Luna: And if you look at the earnings calls, the language is totally different. Luxury CEOs are talking about 'pricing power' and 'exclusivity.' Mid-tier CEOs are talking about 'value-conscious consumers' and 'promotional environment.' Lucas: That's the blind spot I'm focused on. The bull market is real — the S&P is up. But if you're a factor investor, you have to ask: is the market pricing in a luxury recession? Because the consumer is bifurcated. The top 10% are flush with asset appreciation — their homes, their portfolios. The bottom 50% are feeling the cumulative effect of three years of above-target inflation and 3.6% interest rates. Luna: And that's not necessarily showing up in the macro data yet. Real GDP is still growing 2.1% annualized. The Fed's holding at 3.63%. But the market is voting with its feet. The Russell 2000 peaked in late 2021 and hasn't made a new high. The S&P has made several. Lucas: So the question becomes: is the luxury trade a smart rotation or a crowded trade that's about to snap? I'll tell you, I think it's still early. But the risk is that everyone piles into Hermès and LVMH, and the moment the top-end consumer hiccups, the rotation reverses violently. Luna: And there's a Fed factor too. Today we heard from New York Fed President Williams — he said inflation has peaked and rates are 'well positioned.' But also from Chairman Warsh, who sounded more hawkish in his Senate testimony. So rates aren't coming down fast. Lucas: Right, and higher for longer rates hurt the parts of the economy that are levered to consumer credit. Luxury buyers aren't financing a Birkin bag with a credit card. But mid-tier shoppers are financing their wardrobes. That structural gap is going to persist. Luna: So what's the trade? Do you buy the luxury names, or do you bet on a catch-up trade in small caps? Lucas: I think the smart money is watching the earnings per share revision ratio. If luxury names start seeing downward revisions, that's the signal to get out. But right now, the revisions are still positive for Hermès and LVMH. For the Russell 2000, they've been negative for six straight months. Luna: That's a pretty stark divergence. And it ties back to what Buffett said — 'everybody is preferring gambling.' Some of those speculative small caps are essentially lottery tickets, and in a bull market, people chase them. But when the music stops, they'll be the first to fall. Lucas: Exactly. And that's actually why I want to stay grounded here. This show doesn't run ads — we don't have a sponsor telling us to hype a particular trade. If these conversations have helped you think about the market more clearly, and you'd like to support that ad-free approach, there's a link: buy me a coffee dot com slash fexingo. No pressure, just if it's useful. Luna: Yeah, and honestly, that independence lets us call out these divergences without worrying about upsetting an advertiser. It matters. Lucas: It does. So back to the luxury blind spot — I think the takeaway for listeners is: don't let the S&P 500's all-time high fool you into thinking everything is fine. Look under the hood. Check the Russell, check the revisions, check what your own spending habits are saying. If you're feeling pinched, you're not alone, and the market might be reflecting that more than the headlines suggest. Luna: And if you're in luxury names, just keep an eye on that revision ratio. The moment it flips, be ready. Lucas: Exactly. That's the kind of specific, actionable insight we try to bring. Thanks for listening, and we'll catch you next time on Bull Market Conversations.