Retail stocks have climbed in recent weeks as investors hope imminent rebate checks will spur spending. Indeed, a recent survey shows almost 30% of Americans plan to spend the checks. Another 40% will use them to pay down credit-card bills -- but how long will those balances stay down?
Retail HOLDRS ETF (NYSEARCA:RTH) is up 12% over the past 11 weeks, during which Consumer Discretionary SPDR ETF (NYSEARCA:XLY) climbed 9%. Wal-Mart (NYSE:WMT) is up 21% YTD on similar sentiment. All this despite record-high oil prices.
On the other hand, Conference Board said last week that consumer confidence sank to its lowest in 16 years. How to reconcile the conflicting signals?
Not a question, Barron's The Trader says:
"Consumers are a lagging indicator," argues JPMorgan strategist Thomas Lee. "By the time the negative shock has rippled to affect households, financial markets have already discounted this." Also, "consumers are a contrarian indicator," and Lee says consumer-discretionary, staple and financial stocks typically excel when confidence is shot.
Each of five times since 1967 that consumer confidence has sunk to current levels, the S&P 500 has produced average returns of 15% over the next six months and 23% on the year.
JPMorgan has a list of 23 stocks that could benefit from a trend back to consumerism, including Costco (NASDAQ:COST), Masco (NYSE:MAS), Target (NYSE:TGT), Ross Stores (NASDAQ:ROST), Nike (NYSE:NKE) and UPS (NYSE:UPS).
One factor leading to better retail numbers, Ron Haruni says, is increased productivity. Strong retail sales support the argument the U.S. economy will not descend into recession, he says.