Consumer Confidence Down, Time to Buy Retail - Barron's

by: SA Eli Hoffmann

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.

Eliot Penn prefers owning mall REITs (SPG, CDR, EQY, SKT etc.) to retailers and retail ETFs.