Comprising about 65% of the United States' GDP, retail sales are extremely important part of the economy and nothing moves it more than consumer confidence. Over-stretched and underemployed, many consumers felt the burden of high debt loads and failing mortgages. However, after a few years of the "new normal," many consumers have cut spending and reduced debt. Taken as a whole, consumers finances are in a better shape and that reduction in debt could be a big boost for retail sales.

TUTORIAL: Forex Trading 101

Shrinking Balances
After the massive credit expansion that started about 10 years ago, the contraction was severe. Delinquencies, bankruptcies, and record levels of mortgage defaults, have been common place as the credit crisis took hold in late 2007. However, several reports indicate that consumer's finances have improved. According to the Federal Reserve's latest report on household debt and credit, total consumer debt is down 8% from its peak of the third quarter in 2008. The Fed report also showed that the sharp reductions of consumer's revolving credit lines have leveled off in recent months.

There are other signs that financial stress is easing for consumers. Seeing the biggest percentage increase since 1994, more than 29% of surveyed senior loan officers at banks showed that they are more willing to make consumer loans than three months earlier. Energy and gasoline prices have dropped, removing some pressure from consumers. And the Federal Reserve continues to keep interest rates near 0% and retirement account balances have moved upwards, which should help borrowers.

Consumers healing balance sheets seem to be helping the retail sector. According to the Commerce Department, sales at U.S. retailers increased 0.1% for June. Analysts had expected sales to slip by about 0.2%. When compared with June 2010, total sales at retailers are up 8.1%. Shopping malls are seeing greater traffic with Sales were higher in June.

Some Retail Therapy For a Portfolio
While there are some constraints facing consumers, including weak income growth and stubbornly high unemployment, investors may want to consider the retail and discretionary sectors as plays. Investors looking for a broad approach can combine the SPDR S&P Retail (NYSE:XRT) and Vanguard Consumer Discretionary ETF (NYSE:VCR). These funds track a wide swath of retail and discretionary stocks such as McDonald's (NYSE:MCD) and Joseph A Bank Clothiers (NASDAQ:JOSB) and should do well as spending returns.

High-end retail continues to see impressive sales with luxury leaders Nordstrom's (NYSE:JWN) and Macy's (NYSE:M) reporting better earnings and sales following the recession. In addition, high-end women's work-out apparel store Lululemon Athletica (NASDAQ:LULU) is seeing huge growth as more women are willing to shell out $98 for a pair of yoga pants.

While higher retail sales are great for the stores, it's also a blessing for the mall owners. Better sales have translated into higher rents for mall operators and shopping center re-development has helped the sector see increased productivity rates for the first time since 2007. The iShares FTSE NAREIT Retail (NYSE:RTL) tracks a basket of 29 retail focused REITs and can be used as an over-arching play. Both Simon Property Group (NYSE:SPG) and General Growth Properties (NYSE:GGP) represent the two largest American mall operators. Any of those three REITs could be great way to play increasing sales and consumer spending.

The Bottom Line
After enduring the credit crisis, many consumers are seeing the light at the end of the tunnel. With total household debt dropping and some spending pressures beginning to ease, many analysts are predicting a revived retail environment. While there are some strains still facing consumers, investors may want to consider the retail sector and funds like Retail HOLDRs (NYSE:RTH) for the rebound in spending. (In a volatile market, domestic investing can be risky. Many investors choose to look overseas for diversification - but that strategy comes with its own risks. To learn more, see The Risks Of Investing In Emerging Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  2. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  3. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  4. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  8. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  9. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!