It's not totally absurd that people keep spending; job and wage data have both been strong and that is what's putting the money in the pockets of plastic-happy consumers. On the other hand, though, we've got the whole inflation worry that not only could mean higher prices for consumers, but also has the Fed bumping up that federal funds rate which means higher housing costs (think mortgages) and higher APRs on those all important credit cards - and not to mention the fact that SUV pilots across the US are paying around $3/gallon for gasoline! No matter what the job and wage data says, it's still quite the interesting scenario that people are pessemistic about the economy yet still not being shy about breaking out their wallets (or purses).
Maybe it's just a lag and next month retail spending will hit a bit more of a rut. Or maybe it's something more. Maybe we've hit the point of no return in our consumer-centric culture. Is having a Coach (COH) purse or a pair of Prada sunglasses now as much of an inalienable right as choosing a religion? Has "life, liberty and the pursuit of happiness" become "life, liberty and the pursuit of the great fitting jeans?"
I tend to be cynical, but do realize that we're not exactly there. Obviously there is still a good portion of the population that can still discern a necessity and a luxury, but I would definitely argue that there is a growing faction that makes an LCD TV, a pair of CK jeans (owned by Phillips Van Heusen Corp (PVH)), or Jimmy Choo shoes a top priority - whether it means scrimping in other areas or simply putting it on "the card."
And if this is the case, what does that mean for investing? Well it means that high end retailers like Phillips Van Heusen, Nordstrom Inc. (JWN) and True Religion Apparel Inc. (TRLG) are going to do well as people continue to squeeze themselves into tight jeans even as the gas pumps squeeze their wallets, but it also means that stores like Best Buy Co. Inc. (BBY), Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) who sell a lot of other "must haves" are going to continue to see good action.
For consumers who are consistently spending over their own limits it also means somebody is going to have to pay for all this consuming - and that somebody is more often than not square and made of plastic. This means that for all the manic spending that goes on, the credit card companies, like the recently IPO'd MasterCard Inc. (MA) or American Express Company (AXP) are going to do well. And behind the credit cards, the banks that issue the credit cards are also going to get their take of the juice, so guys like Bank of America Corp (BAC) and Citigroup Inc. (C) will also be happy. Just do note that on the banking side the credit card business is only a portion of these ginormous companies.
A lot of market watchers say that strength in retail, particularly high end retail, is a bit long in the tooth, but I am of the opinion that it'll stay pretty strong for the forseeable future. As with any industry, I wouldn't overload a portfolio with retail, but I don't see my portfolio without some retail exposure right now.
For full disclosure, I currently own shares of TRLG and BAC.