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Uptick in Consumer Spending Could Mean a Second-Half Market Rally

Recently, however, discretionary stocks have begun to show some strength again. This is a positive sign as stronger spending from the consumer indicates sentiment is on the rise, and economic growth could accelerate in the second half of the year.

Over the past three years, when discretionary stocks pivoted from lagging to leading the staples sector, it incited a strong rally in the SPDR S&P 500 (SPY).

SPY Chart
SPY data by YCharts

This week is also important for the consumer discretionary sector as both July Retail Sales and August Consumer Sentiment figures are released. Retail sales are expected to show improvement on June’s mild 0.2% gain.

Andrew Grantham, an economist at CIBC World Markets, expects to see spending increase gradually in the second half of 2014 and then accelerate in 2015, according to an investor note. “There are growing indications people are willing to take on more credit and spend more,” he said.

If the economy continues to add jobs and part-time labor declines as a percentage of the workforce, then wages should eventually rise over the next few years. This will lead to more disposable income for the consumer, which should translate into continued leadership of consumer discretionary stocks over the more inelastic consumer staples sector.

A way for the investor to get exposure to stronger consumer spending would be to look for recently battered companies that show signs of bottoming.

Read More: 3 Reasons to Worry About AT&T's Dividends

Dan Wantrobski, managing director of Janney.com, said in a research report that investors looking to gain exposure to consumer spending “may find opportunity” in some of the flushed-out shares of companies in the apparel group.

Among some stocks he recommends considering, Urban Outfitters (URBN), Abercrombie & Fitch (ANF), and American Eagle (AEO), which all “show promise” he states.

URBN Chart
URBN data by YCharts

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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