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. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  8. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  9. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center