Things looked bleak for the U.S. economy heading into 2009. The stock market was in a rut and consumers seemed extremely nervous about the future. Nevertheless, as the year progressed, conditions improved and many of the large name department stores experienced a nice run. Macy's (NYSE:M), for example, saw its shares rebound more than double from its 52-week lows. And other popular chains, including Nordstrom (NYSE:JWN) and J. C. Penney (NYSE:JCP), saw their shares rebound significantly, too.

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The Rebound
As 2009 progressed, the U.S. government stepped in to backstop several large financial institutions, causing the stock market to begin to rebound. In addition, the real estate sector showed signs of improvement, too. These factors, coupled with speculation that selling in the retail space occurred with haste, likely contributed to the rebound among department stores. The fact that the nation had faith that it would push through the recession, based on history, didn't hurt.

Not surprisingly, earnings estimates for department stores rose during the year, stimulating even more interest in the group. Furthermore, it appears that the excitement over the sector could spill over into the first quarter of 2010, as Americans appear to be more optimistic and flush with cash.

The Outlook
Because the American consumer seems more willing to spend money on optimism that the jobs situation will improve, there is a good chance that 2010 earnings will surpass those of the previous year. However, the big question is whether or not the space is a good value. Near-term, the upside for the department stores may be kind of limited. But the aforementioned stocks had a nice run and some profit taking may be in order. As a result, the investment community seems to be behaving as if the economy will rebound with amazing vigor.

There is, however, the risk of a double dip recession. If such a bump in the economic road occurs, the better play would be the discounters. My top picks in the discount space are Wal-Mart (NYSE:WMT) and Target (NYSE:TGT).

Bottom Line

While I can appreciate the move that department store stocks have experienced, I am not overly optimistic about their near-term prospects. The risk of a double dip recession or other bumps in the road are enough to leave me cautious. Therefore, I prefer to focus on the discounters mentioned above. (To learn more, read Dangers Of A Double Dip Recession.)

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