Commodities, Conferences & Climate: A Short Summary of our Busy Week of Q&A
In our Sunday 3/1 “conflict edition” of Macro Monday we highlighted out rule of thumb on shocks to the consumer: (1) duration and magnitude of impact both matter a lot (Sentiment, rates, commodity costs), and (2) gas price impacts either help or hurt real-time (since savings rates and wages don’t change real-time). On gasoline prices, simply put, our math suggests about 50 bp headwind or tailwind for every 10% y/y move in gasoline prices. This week’s roughly 30-40% jump in oil & gasoline is suggestive, then, of 150-200 bp headwind in a 2-3% y/y spending growth environment. That is not being felt yet, but the math is notable.
What do we do about gas price spike if it persists? Trip consolidation occurs. Consumers consciously and subconsciously consider needs v. wants, where they perceive the convenience of co-location benefits, and which discretionary concepts they perceive raising prices. Retailers with reputations for sharply priced gas (WMT, COST) are the net beneficiaries of trip consolidation. We would expect magnified impacts to casual dining and food service concepts with unfavorable price perceptions, which we monitor. We spoke with Gen Z college students this week – the qualitative takeaway is that value matters more than ever and the (fun) burger Instagram fun is really about price/quality/value more than anything else (to that cohort). Apparel GLP tailwinds continue but should face impacts of trip consolidation. We think about shopping trip necessity, value / elasticity perception, co-location with grocery, and digital substitutability. We do note “sticker shock” social media commentary increases, to varying degrees, across the apparel retail complex.
How to think about playing the long, cold, lonely winter (on the East Coast, anyway)? George Harrison’s iconic 1969 “Here Comes the Sun” is on our mind, not least of all due to the excellent and fascinating “Man on the Run” documentary now out. Two high-ROIC sectors that are relatively out of favor (home improvement and auto parts) tend to benefit from non-normal temperature extremes in the ensuing quarters and year. The West Coast had a warm winter; the East Coast had a cold winter. In both sectors, such anomalies tend to subdue business in the short-term but drive elevated maintenance and repair needs out a quarter to a year. There are macro headwinds to be sure (housing turns remain subdued due to rates, some signs of life in mortgage refinancing data before the oil-driven spike). For auto parts, inclement weather hurts vehicle miles traveled, and higher gas prices will incrementally hurt VMT (real-time). With macro headwinds and higher vehicle loan rates, though, we tend to see further softening of new car & truck SAAR – driving up the average age of vehicles driven. We keep in mind that freeze-thaw for both cars and residences leads to failure. We are already seeing and hearing a pickup in plumbing and even foundation work on the East Coast. Long story short, we expect some incremental pressure in these sectors in the short-term, but followed a more spring-loaded demand recovery in 2H26. We’d add that historically, postponed maintenance can have a compounded (and so, larger) impact.
Companies sounded “OK” at recent conferences, focused on tariffs, and that AI is a real cost save opportunity? Sure. As mentioned above, business will change on gas prices, but not in the first 5 days. Consumers are stretched enough and the math suggests using our rule of thumb. Tariff confusion remains front and center operationally across our industry conversations, just as discretionary names had felt the opportunity to lap incremental costs and friction with stability. We continue to see marketing, finance, logistics and pricing as meaningful internal opportunities for AI within the consumer discretionary space.