A sharp reversal in tone on the consumer front could signal a brighter holiday selling season, giving rise to some leftover buying opportunities in the retail sector.
After widespread warnings of a consumer spending slump, better-than-expected economic data on retail sales in October and consumer sentiment in November out Friday investors have renewed hopes for extravagance at the cash register this winter.
"The trends have definitely improved," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "Normally, the time to buy retail stocks is not coming into the Christmas season. A lot of upside is likely already built in by now. That being said, there's probably more on the table now for investors here than there has been at this time in previous years."
Before Friday's opening bell, the government said retail sales increased 0.2% in October, beating Wall Street's consensus estimate of 0.1%. The figure shows a cool-down from September's revised 1.6% growth, but still marks an improvement over the negative trend that developed over the summer.
Excluding automobile sales, retail sales added 0.9%, up from the 0.8% recorded in September and higher than Wall Street's estimate of 0.6%.
The strongest component of retail sales was gasoline sales, up 23.8%. While gains in gas sales may boost the economic data, they don't help retailing stocks, particularly companies that don't sell gas. Still, clothing retailers saw sales rise 0.9%, general merchandisers were up 0.5% and furniture sales added 0.3%.
Later, the University of Michigan said its consumer sentiment index reversed its downtrend and posted a larger gain than expected. In its preliminary reading for November, the index rose to 95.5 from the 91.7 logged in October. Economists were expecting a smaller gain to 93.
Before its November turnaround, the consumer sentiment index had been in decline since July, while the Conference Board's consumer confidence index, whose November reading will be released at the end of the month, has fallen for three months straight. Consumer negativity, stemming from increased debt levels, high gas prices and a sluggish job market, was widely viewed as a sign that consumer spending was hurdling toward a drop-off.
Now, a postelection bounce in the stock market, powered by a string of bullish data points, has the forecasting community reconsidering their hypothesis.
"We've seen consumer spending much greater than personal income in the last few months, so consumers are still a little stretched, but they're still willing to spend," Hyman said. "As we go into the Christmas season, the perception that we may have seen a turnaround in oil and gas prices, even though they're still relatively high, is giving people a more positive attitude."
Oil topped off in late October at $55.67, and its subsequent downtrend lit a fire under stocks that was fanned higher by the decisive electoral victory of President Bush. Then, the government reported a blowout jobs number for October, showing the economy added 337,000 jobs during the month, its biggest gain since March.
"The employment data was outstanding," said Paul Mendelsohn, chief investment strategist with Windham Financial Services. "For the first time in a long time, we really saw the numbers we've been waiting for, and since that time, money has been pouring into the consumer side of the market."
The S&P Retail Index, recently up 0.4% for Friday's session, has added over 11% since oil prices staged their turnaround. If prices continue lower, retailers like
that cater to lower-income consumers, particularly sensitive to gas prices, could continue their surge as the market rallies into the new year.
Shares of Wal-Mart were recently down 4 cents Friday, or 0.1%, to $56.58, but the stock has added roughly 9% since oil staged its turnaround at the end of last month. Dollar General, up 10 cents, or 0.5%, to $20.79, has gained more than 13% since that time.
"While oil was making record highs, these low-end retailers were underperforming the high-end. But since we've seen a turnaround so late in what is normally the holiday buying season for retail stocks, I think there's more left on the table this year for investors to make some money than in previous years at this time," Hyman said.
Emme Kozloff, senior retail analyst with Sanford C. Bernstein & Co., said in a research note Friday that investors should still be cautious despite the bullish data and look for stocks that offer turnaround bets with specific catalysts for growth, like
"While we see this as good news, we would not necessarily extrapolate too far given macroeconomic headwinds in the form of sluggish higher energy prices and job growth," Kozloff wrote.
One month of bullish job data does not make a trend, as the market found after the last time the nonfarm payroll count provided upside surprise in March. That report was followed by seven months of varying degrees of disappointment.
Steven Wood, chief economist with Insight Economics, said whatever the latest numbers may show, consumers are still stretched.
"They're struggling under the weight of high gasoline prices and fairly lackluster job growth, but we seem to be getting some relief in both those areas, and I think consumers are feeling better about the situation," Wood said. "As long as the job creation pace is held up, I think consumers will probably continue to spend at a reasonable pace."
With that in mind, investors could consider moving more money into retail, but with the broader market appearing to break out of its trading range of the last year, hedging bets with exposure to other sectors is never a bad idea.
"Things are looking up, but I wouldn't view retail as a sector where you want to throw all your eggs into one basket and bet on that against all others at this point," Hyman said. "Technology seems to be waking up, and energy still remains a primary focus for many investors in the longer term, including us."