Wall Street Not Factoring In New Reality

Since the S&P 500 index bottomed on March 9th, the S&P 500 retail sub-index has gained 77 percent, outpacing the well known bellwether by 15 percentage points. Meanwhile, from March through the end of last month, the Census Bureau's Index of adjusted retail and food services sales is estimated to have gained a paltry 2.5 percent -- before inflation.

In fact, since the end of December 2007, the month the current recession officially began according to the National Bureau of Economic Research, the retail sector has outperformed the broad market by 25 percentage points and is actually higher than it was just over 22 months ago (the S&P 500 index, in contrast, is down 22 percent). At the same time, retail sales are estimated to have fallen by around 7.5 percent (again, in nominal terms) over that span.

Aside from casting doubt on equity investors' alleged forecasting abilities (which is not hard to do considering they ran the market up to record highs in October 2007), the continuing divergence between sector share price and industry revenue trends suggests to me, at least, that Wall Street isn't really factoring in the secular change in attitudes that is not only apparent in the following CBS News story, "Recession Teaching Folks To Be 'Frugal Forever,'" but in many other reports as well:

Families Are Hitting Thrift Shops, Cutting Back On Christmas, Doing Repair Projects Themselves Reporting

"Frugal Forever!" It's the new rallying cry for many Americans.

Nearly 80 percent of consumers say they've personally felt the impact of the Recession, so they're living with less.

While the children in her home daycare sleep, Kim Starkey cleans. She's given up the luxury of a cleaning person in order to save $140 a month. Skipping her monthly massage saves another 75 bucks.

Comments

[Leftfield:]

One factor that will loom in our cultural memory for a long time: If you're an average person with credit cards, or worse, a business person with lines of credit, you find them shrinking or pulled and interest rates jacked to loan shark levels. A vicious circle commences. Your credit score has been lowered by these actions regardless of whether you have spotless payment history, which closes more doors and raises more costs.
If you have a balance you can't just pay off, you're screwed. If you are teetering on the precipice, this can push you into bankruptcy. Really nasty when you consider the kid glove treatment TBTF entities get followed by bailouts. Some of these are the ones who now screw the public.
A sense of fair play was ingrained in our culture. I think people will long remember the shameless cruelty that comes down upon them when they are dependent upon faceless, large, powerful institutions. They need to translate that into the same understanding, that government is not their friend. Take the incumbent trash out every election and don't depend on their lies either.

Nov 16 07:40 AM

[chris coonan:]

Christmas spending isn't everything, and cutting back will be a 2010 and beyond trend....it may also be a Christmas unfulfilled for the Retail segment.

Nov 16 08:54 AM

[NEOblogger:]

Discussions upon what the consumer is going to do will always remain gobbledygook while we continue to regard them as one homogeneous group, or base ideas on their behavior on weak tags such as age and income.

Research by the Social Intelligence Lab (www.socialintelligence.../) looking at 800,000 people over 10 years shows that the majority of the US population behave exactly as this article suggests and will hold on to their wallets for a long time to come as the psychological effect of this recession will stick around for a long time to come. This is why Wal-Mart and Costco will continue to outperform as price is everything for this group.

However SiL tracks 24% of the population, who they call NEOs, are more resilient, spend more and rank higher on consumer confidence. Guess what, wealth is only a small factor in predicting spending.

SO will we have consumers in perma-saving role? Yes. And simultaneously we will have others whose discretionary spending will drive some companies that understand this group (e.g. Apple, Mini, Anthropologie) to better results for years to come.

COmpanies have to be either the lowest cost provider or have a unique offering that appeals to the NEO group. Getting stuck in between will mean it is challenging for a long time to come. Knowing which companies can hit either end of this continuum is vital in picking winners and understanding the consumer. Avoid those stuck in the middle.

Nov 16 12:51 PM