Now that the presidential puzzle has been solved, Wall Street can finally turn to more pleasant thoughts, like holiday shopping. Not for gifts to put under the tree, but for retail stocks ahead of what analysts expect to be a robust holiday season.
"The move into retail stocks may not last long, so if you are going to move, move now," says Richard Hastings, retail sector analyst with Bernard Sands LLC.
Hastings says Friday's overwhelming jobs data could boost the retail sector by reducing fears of a hesitant or tapped-out consumer. He expects holiday spending in November and December to rise between 4.75% and 5.25% from a year ago. That's weaker than last year's 7.6% gain but still impressive.
"If people find a source of income, they will leverage it and spend like crazy. Even if they don't have sufficient funds for the holidays, they will make it up with credit," says Hastings.
It's hard to disagree with Hastings' logic that retailers should get a jolt when consumers have job security. Before charging off to buy retail stocks based on optimistic holiday sales forecasts, however, investors should keep in mind that the S&P Retail Stock Index underperformed the
by over 7 percentage points last year from November to December and by greater than 5% for the same period in 2002. Meanwhile, the
continues to slowly raise interest rates, creating a bit of a headwind for all stocks.
If that complicates matters for investors bent on buying retailers ahead of the holidays, one method for spreading the risk is to invest in retail-heavy exchange-traded funds, or ETFs. These securities are similar to index mutual funds but have the advantage of trading much more like stocks. Examples include the
Retail HOLDRs Trust
Consumer Discretionary Sector SPDR
Merrill Lynch offers the only pure play retail ETF in its HOLDRs lineup. The retail HOLDR consists of 20 major retailing names stretching across the retail spectrum, from online giant
to conventional retailing powerhouse
are the largest stocks in the portfolio, at 20.5% and 17%, respectively. Fighting it out for third place with weightings of just over 8% are
Michael Niemera, chief economist with the International Council of Shopping Centers, agrees that the improving employment picture will boost holiday spending. But he says higher energy prices might curb consumer spending at low-end retailers.
"The high end has done well this year and will continue to do well, and the middle is a mixed bag that depends on what's hot," says Niemera. "The Wal-Marts and Lowe's at the low end, however, are still susceptible to problems related to high gas prices."
Interested investors should also take note that while HOLDRs, short for holding company depositary receipts, have many of the same characteristics as ETFs, such as transparency and liquidity, there are important structural differences. HOLDRs don't track a specific index like traditional ETFs. And once the HOLDR starts trading, the baskets are not rebalanced on a quarterly or biannual basis, unlike index ETFs. That means the proportions of stocks within the HOLDRs can change drastically, at times leaving an issue heavily concentrated in just a few names.
One way to avoid potential problems with Wal-Mart is to purchase instead the Consumer Discretionary SPDR (often referred to as a sector Spyder), an ETF that tracks the consumer discretionary stocks that make up 11.4% of the S&P 500. Although retail stocks only make up 22% of the portfolio, this ETF does include other areas that bounce with a buoyant consumer. These include media, which accounts for 33% the portfolio, and hotel and leisure stocks, which make up 12%.
And it notably does not hold Wal-Mart because S&P places the world's largest retailer in its consumer staples category. (Wal-Mart actually accounts for 22% of the sector Spyder from this category, the
Consumer Staples SPDR
Wal-Mart might be absent, but one name that does pop up in this portfolio is Internet auctioneer
, a stock that is often placed in technology funds. eBay doesn't appear in the Merrill HOLDR either.
With Wal-Mart out of the way, the largest bricks-and mortar retailers in the sector Spyder are Home Depot, Lowe's and Target at 7.25%, 3.77% and 3.5% of the portfolio, respectively.