Consumer Spending and the Cross-Section of Stock Returns

Abstract

Using a unique dataset of individual transactions-level data for a universe of US consumer facing stocks, we examine the information content of consumer credit and debit card spending in explaining future stock returns. Our analysis shows that consumer spending data positively predict various measures of a company’s future earnings surprises up to three quarters in the future. This predictive power remains strong in both large- and small-cap universes of consumer discretionary firms in our sample and is robust to the type of transactions data considered (credit card, debit card, or both), although the relationship is stronger in the small-cap universe where informational asymmetries are more pronounced. Based on this empirical observation, we build a simple long–short strategy that takes long–short positions in the top/bottom tercile of stocks ranked on our real-time sales signal. The strategy generates statistically and economically significant returns of 16% per annum net of transaction costs and after controlling for the common sources of systematic factor returns. A simple optimization exercise to form (tangency) mean–variance-efficient portfolios of factors leads to an optimal factor allocation that assigns almost 50% weight to our long–short portfolio. Our results suggest that consumer transaction level data can serve as a more accurate and persistent signal of a firm’s growth potential and future returns.